By Ambrose O’Callaghan
Healthcare has spent the past several years as the forgotten sector in the market. After outperforming during the 2022 pullback, healthcare has lagged the broader market in every year since. Meanwhile, its weight in the S&P 500 has fallen from roughly 16% at its peak to around 9% at the time of this writing. This pushes healthcare from the second-largest sector in the index, to the fifth largest. That is below even its relative low in 1999.
The decline for healthcare has been driven in large part by the market’s singular focus on Technology and Communications earnings growth, rather than by weak fundamentals. That trend continues to pull capital and attention away from nearly every other sector.
A shift on the horizon?
There are signs that the setup for the healthcare sector is beginning to shift. Positioning data shows investor ownership of healthcare sits near the bottom of its long-term range. Meanwhile, the sector has increasingly become a funding source for concentrated bets elsewhere, particularly in AI-related names.
Earlier this year, Harvest ETFs President and Co-CIO Paul MacDonald provided an overview of the healthcare sector. He pinpointed several exciting areas in the space, including the robotic assisted surgery (RAS) market and of course the impact of GLP-1s.
Short interest, which measures how much short selling has occurred against a company’s stock or the equities in a specific sector, has hit near five-year highs across major healthcare sub-sectors.
Historically, this combination of light ownership, elevated bearish positioning, and improving fundamentals, has been the backdrop against which sentiment changes.
Signs of inflection
There are early signs that a sentiment shift may be underway in healthcare. Twelve-month rolling fund flows into healthcare ETFs have turned decisively positive after years of steady outflows. This represents one of the strongest readings since the recovery began earlier this summer.
Valuations tell a two-sided story. Healthcare is not incredibly cheap against its own history. However, it remains meaningfully discounted relative to the broader market. Medical devices, tools, diagnostics, and select biopharmaceutical names are trading well below their historical norms.
Earnings in the healthcare sector may be the most important piece of the picture at this juncture. Consensus estimates call for healthcare net income growth to be roughly flat in 2026 before re-accelerating sharply in 2027. That rebound is expected alongside expanding earnings breadth and estimate revisions moving higher. This is a profile that stacks up favourably against much of the rest of the market.
Rolling relative returns versus the broader market are near levels visited only a handful of times since the mid-1990s. Each of these instances were followed by a period of relative strength. However, timing and magnitude of that strength has varied.
Searching for catalysts
At the time of this writing, we sit less than three short months from a crucial United States midterm election season. There remains no reliable playbook for how healthcare trades around the midterm elections. When we look back across every cycle since 1990, healthcare’s performance in the months before and after election day has been inconsistent. This is true for both the sector and sub-sector level.
Summary
Healthcare enters the second half of 2026 out of favour. The sector is lightly owned, discounted relative to the market, and positioned for a real earnings inflection in 2027. None of this guarantees a straight line higher. But, for investors looking to diversify away from a market concentrated in a handful of sectors and styles, healthcare’s combination of durable demand, improving earnings visibility, and depressed positioning makes for a compelling recovery story.
Click below to read our full report on the state of the healthcare sector: Prescriptions for Relief, from Harvest ETFs President and Co-CIO Paul MacDonald, portfolio manager of the Harvest Healthcare Leaders Income ETF (TSX: HHL), Canada’s largest healthcare ETF.
Prescriptions for Relief: Signs of Recovery in Healthcare
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