By Jacob Sonenshine

Healthcare has been one of the worst-performing sectors in the S&P 500 this year, quietly slipping while Wall Street keeps its eyes locked on oil prices and AI.

The underperformance is unusual, as healthcare is seen as a defensive sector, one that investors move into -- not away from -- when risks to the economy emerge.

Now, investors should take another look at healthcare, as conditions seem right for a rebound.

Much of healthcare's underperformance began in late February after the U.S. and Israel attacked Iran, increasing risks to the global economy. The State Street Health Care Select Sector SPDR Exchange-Traded Fund, home to the largest U.S. health insurers, medical device makers, and drugmakers, was down almost 4% this year through Tuesday's close. That makes it one of the worst performing S&P 500 sectors, with the benchmark index having dropped 2% in that period.

Investors have been trying to capture earnings momentum in AI-related semiconductor stocks and the potential for larger profits for oil producers, sending stocks in those industries higher. But what goes up may very well come down, especially if economic growth takes more hits from private credit worries or any other factor.

That's why healthcare looks appealing.

For starters, the healthcare fund won't burn investors so badly if the broader market takes a turn for the worse. A perfect example is when the S&P 500 dropped 25% from its record high in early 2022 to the bottom of its bear market later that year. The healthcare fund fell only about 12% in that stretch. The main reason is that weakening consumer spending doesn't much hurt demand for healthcare products and services, which people will buy even if their financial situation isn't rock solid.

Put simply: "Favor the quality factor and healthcare for more defensive exposure," Mike Wilson, Morgan Stanley chief U.S. equity strategist, wrote in a note out Monday.

Secondly, investors don't even have to buy the sector anywhere near its peak. Instead, it's particularly cheap.

The ETF trades at just under 18 times aggregate earnings analysts expect for the coming 12 months, below the S&P 500's just under 21 times. That's about 14% below the S&P 500's multiple. While that's not the steepest discount historically, it's far cheaper than the 19 times peak for the year. When healthcare is in favor, it can trade close to in-line with the S&P.

This means healthcare's multiple is unlikely to fall harshly from here -- clearing the way for earnings growth to bring the stocks upward.

Growth is in the cards. Analysts for the healthcare fund expect just over 5% annual sales growth for the coming two years, according to FactSet, driven partly by medical devices makers such as Stryker, Boston Scientific, and Medtronic, which are benefiting from an aging population that requires more cardiac and orthopedic procedures every year.

Drugmaker Eli Lilly is growing rapidly on the back of its GLP-1s. UnitedHealth Group and Humana can grow revenue mildly, with analysts forecasting growth in Medicare advantage members.

The resulting sales growth for the sector should push profits higher. It can help nudge margins up a bit, especially with the insurers and even other companies in the sector using AI to cut costs and identify the best patient outcomes. That's why analysts are looking for just over 10% annual earnings growth for the coming two years.

Make sure to own some healthcare. It's part of taking good care of a portfolio -- especially right now.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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March 18, 2026 11:57 ET (15:57 GMT)

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