In recent months, as uncertainty about the economy has grown, healthcare has benefited from a rotation into more defensive stocks. In our view, the setup for the sector remains attractive. Still-reasonable valuations, falling interest rates, a quiet U.S. election cycle (at least for healthcare), and rapid innovation all make the case for the sector’s momentum to continue.

A GOOD STARTING POINT

As some areas of the market saw rapid multiple expansion during the first half of 2024, the healthcare sector often traded at a discount to the S&P 500 Index. The underperformance reflected investor preference for high-flying areas such as artificial intelligence and came amid a resetting of supply/demand dynamics in healthcare following the pandemic. Persistently high interest rates also weighed on long-duration stocks, such as biotech.

Since then, healthcare valuations have started to normalize, but some areas of the sector — including those that