As concerns over an "AI bubble" sweep through global financial markets, investors are reevaluating their heavy bets on tech stocks with unclear AI monetization pathways. Since November, capital has flowed decisively into value stocks—companies with stable cash flows, consistent earnings, and historically low valuations compared to AI darlings like NVIDIA, AMD, and Micron.

Leading this rotation is the healthcare sector, long considered a defensive play and a barometer for global value stocks. The S&P 500 Health Care Index has surged 10% year-to-date, outperforming all other S&P 500 subsectors, while the broader index fell 1.1%. Eli Lilly, maker of the blockbuster weight-loss drug tirzepatide, soared 29%, becoming the first healthcare firm to hit a $1 trillion market cap. Regeneron, Merck & Co., and Biogen have also rallied over 18% since late October, eclipsing both the S&P 500 and Nasdaq 100.

This shift is largely driven by hedge funds ("smart money"), with Goldman Sachs data showing healthcare as the most net-bought value sector for four straight weeks—last week’s inflows were the largest in five years. Mutual funds followed suit, raising allocations above their S&P 500 ETF weightings.

"With parts of tech priced to perfection and AI bubble fears mounting, investors are hunting for undervalued opportunities," said Sarah Hunt of Alpine Woods Capital. The healthcare rally coincides with heightened volatility in tech-heavy indices, making value stocks an attractive hedge. NVIDIA, Oracle, TSMC, and other AI favorites have slumped amid doubts over valuation sustainability and AI monetization.

Healthcare’s momentum aligns with PivotalPath’s findings: its healthcare index rose 13% in Q3, fueled not just by AI-driven rotations but also strong trial results, AI-accelerated R&D, and resurgent biopharma M&A. "Excess returns stem from active pipelines and regulatory tailwinds," noted PivotalPath CEO Jonathan Caplis.

Goldman reports hedge funds’ healthcare overweights hit a decade high in Q4 (excluding brief 2020/2023 spikes), after a 260bps increase in Q3. Standouts include Merck (+23% in November on post-Keytruda optimism), Regeneron (+21% on high-dose eye drug approval), and Amgen (+14% on earnings beats).

"Healthcare’s prolonged underperformance made investors forget its growth potential. Now, with revenue/earnings inflection points and AI fears, money is flooding back," said Roundhill Financial’s David Mazza. At 18.7x forward P/E versus the S&P 500’s 22.1x, valuations remain attractive.

Q3 earnings reinforced the thesis: healthcare led S&P 500 sectors in earnings beats, driven by new drug uptake, weight-loss drug demand, and hospital visits. Biotech shines brightest, per Goldman, citing clinical breakthroughs, M&A revival, and AI-driven R&D. Alnylam tops its "Rising Stars" list, while Abivax, Natera, and Cidara joined hedge funds’ "VIP" picks.

The "Santa Rally" narrative faces tests as Fed uncertainty and AI skepticism grow. Hedge demand against tech declines nears August 2024 highs, while the VIX hovers near 20—a selloff signal. "Seasonality helps, but isn’t foolproof," warned Solus’ Dan Greenhaus.

Yardeni Research sees the S&P 500 unlikely to hit 7000 amid AI profit-taking. Roth Capital advises tech caution, and Wells Fargo downgraded IT (home to NVIDIA, Microsoft, Broadcom) to "neutral" on valuations, urging shifts to healthcare, utilities, industrials, and financials. JPMorgan notes the market’s pivot from "Fed-watching" to "tech-to-value rotation," calling U.S. value particularly compelling globally.