Healthcare as a 2026 Outperformer: Why Investors Should Shift From Tech to Biotech and Pharma

The global investment landscape is at a pivotal inflection point, with sector rotation emerging as a critical strategy for navigating macroeconomic uncertainties and capitalizing on mispriced opportunities. As 2026 approaches, the healthcare sector-particularly biotech and pharma-presents a compelling case for outperformance, driven by historically attractive valuations, easing regulatory headwinds, and a surge in innovation and M&A activity. In contrast, the overvalued tech sector, despite its recent dominance, faces mounting risks from macroeconomic headwinds and a potential AI-driven correction. This analysis argues that investors should rebalance portfolios toward healthcare, leveraging its favorable risk/reward profile and structural growth drivers.

1. Healthcare: A Sector Trading at a Discount to Historical Norms

The healthcare sector's valuation metrics in 2025 suggest a compelling entry point for long-term investors. As of November 2025, the S&P 500 Health Care Sector trades at a P/E ratio of 24.02, which is within its 5-year average range of [18.81, 28.32] and only modestly above its 10-year average of 20.49 according to data. While this may not appear undervalued at first glance, a closer look reveals significant dispersion within the sector. For instance, the Healthcare Services Group (HCSG) trades at a P/E of 21.76, and HCA Healthcare, a major hospital operator, has a P/E of 18.66-44% above its 10-year average but still below the sector mean according to full ratio data. These figures indicate a mixed valuation landscape, with key players trading at discounts relative to historical norms.

Moreover, the sector's broader valuation compression-evidenced by large-cap names like Merck and Pfizer reaching multi-decade lows-suggests a potential mean reversion opportunity. In contrast, the S&P 500 Technology Sector trades at a P/E of 29.6x, significantly above its 10-year average of 22.0x. This stark divergence highlights healthcare's relative attractiveness, particularly for investors seeking defensive, earnings-driven growth.

2. Easing Policy Risks: A Tailwind for Biotech and Pharma

Regulatory uncertainty has long been a drag on healthcare sector performance, but 2025 reforms and policy resolutions have created a more favorable environment. The U.S. Food and Drug Administration (FDA) has introduced streamlined approval pathways, including a Commissioner's National Priority Voucher pilot program that could reduce review times for critical therapies from 10–12 months to just 1–2 months. These changes, coupled with the Trump administration's "America First" policies, are reducing bureaucratic friction for drug developers.

A pivotal policy risk-the "most favored nation" (MFN) pricing initiative-has also been mitigated. The resolution of this overhang, exemplified by Pfizer's agreement with the U.S. government, has restored investor confidence in the sector's pricing power. Additionally, the FDA's shift toward risk-based assessments, and New Approach Methodologies (NAMs), such as organoids and computational toxicology, is reducing reliance on costly animal testing and accelerating preclinical development. These reforms position biotech and pharma firms to capitalize on innovation cycles without being shackled by regulatory delays.

3. Innovation Momentum: AI, Cell & Gene Therapies, and Obesity-Driven Growth

The healthcare sector's innovation pipeline is gaining unprecedented momentum, driven by AI integration, advances in cell and gene therapies, and surging demand for obesity treatments. AI is now embedded in biopharma infrastructure, from molecular design to regulatory operations. For example, Eli Lilly's partnership with NVIDIA to build an AI supercomputer capable of running trillions of molecular simulations annually underscores the sector's technological leap. Similarly, AI is streamlining clinical trial processes, reducing timeframes for IND submissions, and improving data integrity.

Cell and gene therapies are another growth engine, with the FDA approving 46 such products by August 2025. These therapies, targeting rare diseases and oncology, offer high-margin, differentiated solutions that align with investor appetite for innovation. Meanwhile, the obesity epidemic has created a lucrative market for GLP-1 and amylin-based therapies, with major acquisitions like Pfizer's $10 billion purchase of Metsera signaling the sector's competitive intensity.

4. M&A Surge: A Structural Catalyst for Sector Rotation

The biotech and pharma M&A landscape in 2025 has reached a decade-high, driven by patent cliffs, regulatory clarity, and the need to replenish pipelines. High-profile deals, such as Johnson & Johnson's $14.6 billion acquisition of Intra-Cellular Therapeutics and Merck's $10 billion purchase of Verona Pharma, highlight the sector's strategic focus on innovation and commercial viability. These transactions are not only boosting investor sentiment but also signaling a shift toward value creation through consolidation.

The tailwinds for M&A are expected to persist into 2026, supported by falling interest rates and the resolution of policy uncertainties. With large pharmaceutical firms holding substantial capital reserves, the sector is well-positioned to continue acquiring high-potential biotechs, further accelerating growth and earnings visibility.

5. Risk/Reward Dynamics: Healthcare vs. Tech

The case for sector rotation is strengthened by divergent risk/reward profiles. The healthcare sector has outperformed the Technology sector in recent months, with the S&P 500 Health Care Sector rising over 6% since mid-October compared to the Technology sector's flat or negative performance. This outperformance aligns with Schwab's upgrade of healthcare to "Outperform", citing its defensive characteristics and resilience during market volatility.

Conversely, the Technology sector-dominated by the "Magnificent Seven"-faces headwinds from macroeconomic pressures and a potential AI-driven correction. With valuations stretched at 29.6x, the sector's beta remains elevated, exposing investors to heightened downside risk according to RBC analysis. In contrast, healthcare's lower volatility and stable earnings growth make it a more attractive haven in a 2026 environment marked by geopolitical tensions and interest rate uncertainty.

Conclusion: Rebalancing Toward Healthcare in 2026

The healthcare sector's combination of attractive valuations, easing regulatory risks, innovation-driven growth, and robust M&A activity positions it as a prime candidate for outperformance in 2026. As investors reassess overvalued tech stocks and seek sectors with durable cash flows and structural growth, biotech and pharma offer a compelling alternative. By rebalancing portfolios toward healthcare, investors can capitalize on a sector poised for mean reversion, innovation-led expansion, and a more favorable regulatory climate.