Investors have pushed the healthcare sector to a record high, and some favored stocks have high projected revenue growth rates through 2028
The S&P 500 healthcare sector hit a high this week, as investors bucked the broad trend and supported a rising forward price-to-earnings ratio for this group of companies.
There's a saying on Main Street that recent stock-price action suggests investors on Wall Street are starting to believe - you get what you pay for.
The healthcare sector has been one of the best performers this month, but it has also been the most expensive relative to historical valuation measures, such as the ratio of stock price to earnings per share.
Conventional wisdom suggests healthcare is benefiting from its defensive nature - consumer demand is based on need, rather than want - amid growing investor worries about the sustainability of the artificial-intelligence trade. That might make sense except for the fact that the State Street Health Care Select Sector SPDR ETF XLV just closed this week at a record high, to suggest it was performing well even as the AI trade was still hot just a couple weeks ago.
And out of the S&P 500's SPX 11 key sectors, healthcare XX:SP500.35 has been one of just two that has seen its price-to-earnings ratio rise - the other being the defensive consumer-staples sector - while the technology sector XLK has seen the biggest decline in its P/E ratio.
One take on that development is that healthcare is getting expensive, while technology stocks are getting cheaper. But in this case, the change in P/E ratios may not be a reflection of price, but rather investor belief in the value of earnings. Tech stocks might be "cheap" because either investors don't trust what analysts are saying about future earnings, or they want more earnings per share to soothe their worries.
Think about a stock with a high dividend yield; it either means the stock looks attractive because of the high payout, or that it's a symptom of a poor-performing stock and a warning that a dividend cut maybe coming.
Yet there's reason to believe there's more to the recent rally in healthcare than just defensive positioning. It appears investors are starting to play offense.
Trung Huynh, an analyst at RBC Capital Markets, said the biopharmaceutical sector's fundamentals are in good shape, as much of the previous uncertainties surrounding how the Trump administration might affect the way companies do business has faded. There's also the boost from strong demand for GLP-1 weight-loss drugs and new innovations in cancer therapies, which has helped propel shares of Eli Lilly (LLY) and Merck (MRK) to record highs and sparked a more than eightfold rally in Moderna's stock (MRNA) this year.
"Fundamentally, they have really performed this year," Huynh said.
And rather than being just an anti-AI play, investors may be starting to see how the implementation of AI can lead to many positive developments within the healthcare sector.
"Life-sciences tools companies such as Thermo Fisher $(TMO)$ and Danaher $(DHR)$ are seeing improving biopharmaceutical demand and research spending, while AI creates additional opportunities in drug discovery and laboratory automation," Elena Meng, a portfolio manager and research analyst at Gabelli Funds, wrote in an email exchange with MarketWatch.
She added that AI and machine learning have been "accelerating innovation in cancer diagnostics by enabling more sophisticated analysis of complex genomic and molecular data" - with companies such as Guardant Health (GH), Grail $(GRAL)$ and BillionToOne $(BLLN)$ "developing blood-based technologies for earlier cancer detection, personalized treatment selection and disease monitoring.
"Investors are increasingly recognizing the enormous commercial potential of this convergence between AI and precision medicine," Meng wrote.
The below table shows how healthcare has performed, not only on a stock-price basis but in terms of P/E ratios. The 111% reading for the forward P/E to the five-year average means current P/E is 11 percentage points above the historical average.
One-week price change through Oct. 20 One-week price change through Oct 20 October price change 2026 price change Forward P/E Forward P/E as of Dec. 31 Forward P/E to 5-year average
Healthcare 5.8% 6.7% 16.0% 19.7 18.6 111%
Consumer Staples 4.0% 8.9% 13.4% 23.7 22.2 109%
Materials 2.3% 4.9% 12.8% 17.2 19.3 96%
Consumer Discretionary 2.3% 5.9% -0.7% 25.3 29.6 91%
Financials 1.6% 4.2% 1.6% 14.4 16.3 96%
Energy 1.2% 10.6% 52.0% 13.1 16.0 103%
Real Estate 1.1% 3.2% 6.0% 17.1 17.1 94%
Utilities 0.0% 6.2% -2.0% 16.4 17.9 92%
Industrials -1.1% -0.1% 7.5% 22.4 24.0 105%
Communication Services -4.1% -1.8% 2.1% 18.0 22.4 98%
Information Technology -4.8% -4.1% 22.6% 19.9 26.6 78%
S&P 500 -1.2% 0.8% 12.7% 19.0 22.2 94%
Source: FactSet
The healthcare sector showed the largest price gain for one week of 5.8%, while the information-technology sector XX:SP500.45 brought up the rear with a 4.8% decline.
For the full S&P 500, the forward P/E ratio has declined to 19, from 22.2 at the end of last year, reversing the rising trend over the previous three years. This shows that during 2026, the index's weighted rolling 12-month consensus earnings estimates among analysts polled by FactSet have been rising more quickly than share prices.
With a forward P/E of 19.7, the healthcare sector is the most expensive relative to its five-year average valuation.
As if to underscore investors' surprising confidence in expensive but traditionally slower-growing sectors, Rob Anderson, U.S. sector strategist at Ned David Research, wrote in a note to clients Tuesday that "every sector except healthcare and consumer staples is expected to grow earnings by double digits" in both the third and fourth quarters.
A healthcare-sector screen
Since the healthcare sector has been the strongest performer over the past week, this is a good time to screen its 60 stocks to see which ones might offer the best prospects for long-term investors.
According to FactSet's weighted estimates, the S&P 500 healthcare sector is expected to increase revenue at a compound annual growth rate (CAGR) of 4.8% from 2026 through 2028. That compares with a projected sales CAGR of 8.5% for the S&P 500, which, of course, is still heavily weighted to the information-technology sector.
Among the 60 companies in the healthcare sector, these seven have majority "buy" or equivalent ratings among analysts polled by FactSet, while also having projected revenue CAGR of at least twice the 4.8% projected for the sector from calendar-years 2026 through 2028:
Company Two-year estimated sales CAGR Two-year estimated operating-income CAGR Forward P/E Oct. 20 price Cons. price target Implied 12-month upside potential Eli Lilly 13.8% 22.8% 28.7 $1,283.66 $1,368.14 7% Insulet 13.8% 19.4% 19.1 $142.64 $165.00 16% Veeva Systems 12.4% 12.6% 31.9 $318.67 $299.15 -6% Intuitive Surgical 12.3% 11.8% 36.4 $438.00 $483.66 10% Vertex Pharmaceuticals 11.5% 15.3% 25.0 $514.65 $575.96 12% DexCom 11.1% 17.3% 28.2 $85.74 $97.36 14%
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