Beyond mega-cap tech: healthcare's opportunity

Healthcare has been one of the clearest casualties of the narrow market leadership that has characterized the current bull market. As investors concentrated capital in AI-related beneficiaries and mega-cap technology companies, the sector steadily fell out of favor despite continuing to generate attractive earnings and cash-flow growth.

Healthcare also faced a series of idiosyncratic challenges, including uncertainty surrounding drug-pricing reform, pressure on Medicare Advantage reimbursement rates, and post-pandemic normalization across diagnostics, medical devices and life-science tools. The result has been one of the sector’s longest periods of relative underperformance in decades.

At the same time, healthcare's weight in global equity benchmarks has declined materially, leaving many investors underexposed relative to historical levels.

Ironically, many of the factors that contributed to healthcare's underperformance may now be creating the foundation for future outperformance as market leadership broadens beyond a narrow group of technology stocks.

Historically, new market leaders tend to emerge when improving fundamentals coincide with attractive valuations and subdued investor expectations. Healthcare increasingly exhibits all three characteristics.

Several headwinds that weighed on healthcare over recent years are becoming more manageable.

Specifically, many of the sector's biggest uncertainties are giving way to greater visibility.

1. Policy clarity is improving. Investors now have greater clarity around the Inflation Reduction Act's drug-pricing provisions, reducing one of the largest sources of regulatory uncertainty facing the sector. Greater visibility is also beginning to emerge around pharmaceutical tariffs and Most Favored Nation (MFN) drug-pricing proposals.
2. Managed-care fundamentals are stabilizing. Recent reimbursement updates have become more supportive while insurers continue repositioning businesses to restore profitability.
3. Utilization trends are becoming more predictable. Several years removed from the pandemic, healthcare companies and investors have a clearer view of underlying demand patterns.

Importantly, these improving healthcare fundamentals are emerging as investors begin to examine opportunities beyond mega-cap technology. As a result, investor focus is beginning to shift from uncertainty toward fundamentals.

While healthcare has struggled to capture investor attention in recent years, the sector's long-term growth drivers have remained remarkably resilient.

The long-term investment case for healthcare remains supported by several powerful secular trends. Demographic aging, rising chronic disease prevalence, expanding access to healthcare, and medical innovation continue to drive durable demand growth.

Longevity is emerging as a force multiplier across these trends. Advances in medicine have transformed many acute and fatal diseases into chronic conditions that can be effectively managed for decades.

The global population is not only aging but also living longer. As the number of people over the age of 60 continues to rise, a growing share of the population is entering the life stage associated with the highest levels of healthcare utilization.

By 2030, one in six people worldwide will be aged 60 years or over

At the same time, rising life expectancy is extending the number of years during which individuals consume healthcare. While people are living longer than previous generations, gains in lifespan have often outpaced gains in healthy, disease-free years.

This dynamic is likely to support growing demand for pharmaceuticals, medical devices, diagnostics, procedures, and healthcare services as a larger share of the population enters its highest-utilization years.

Why health remains our most valuable asset

People are living longer and spending more on healthcare.

Life expectancy vs healthcare spending per capita in the US (USD)

As people age, healthcare spending rises exponentially, driving demand for treatments that preserve quality of life, independence and function.

Estimated annual spending by age, the US, 2020

Despite advances in medicine, diseases continue to drive substantial morbidity, highlighting the need for therapies that deliver better patient outcomes.

Burden of disease by cause (top 10, million), the US, 2023

As a result, longer lives do not necessarily translate into fewer healthcare needs. Instead, they can extend the period over which individuals require treatment, monitoring, and medical intervention.

This demographic shift is being accentuated by the rising burden of chronic disease. Obesity, diabetes, cardiovascular disease, cancer, and mental health disorders continue to increase globally, while longer lifespans mean more people are reaching ages at which conditions such as dementia, Parkinson’s disease, osteoporosis and degenerative joint disease become more prevalent. Together, these trends are increasing the need for diagnosis, treatment and long-term care, creating sustained demand for healthcare innovation and services.

Obesity and metabolic disorders have reached epidemic proportions, while mental health conditions now affect roughly one in seven people worldwide. Unlike acute illnesses, these conditions typically require long-term management, ongoing consultations with physicians, pharmaceuticals, diagnostics, and interventions involving medical devices.

Together, these trends support sustained growth in demand for healthcare services. Unlike many growth opportunities, longevity-related demand drivers are highly durable and largely independent of the economic cycle.

The result is a powerful long-term demand backdrop: more people reaching their highest-utilization years, living longer, and requiring healthcare support for a greater portion of their lives.

Much of the investment discussion surrounding AI has focused on companies building the underlying infrastructure. Less attention has been paid to sectors that may ultimately create value through AI adoption. The first phase of AI rewarded the builders; the next phase may increasingly reward the adopters. Healthcare sits at the center of that opportunity.

The sector is both data-rich and labor-constrained. AI has the potential to improve diagnostics, accelerate drug discovery, automate administrative workflows, and enhance clinical decision-making.

1. From data to diagnosis
   Healthcare generates vast amounts of data, much of which remains underutilized. AI has the potential to unlock value from medical imaging, electronic health records, genomics, and other datasets by improving disease detection, accelerating drug discovery, and enabling more informed clinical decision-making.
2. Extending the healthcare workforce
   As aging populations increase demand for care, many healthcare systems face shortages of physicians, nurses, and other healthcare professionals. AI can help alleviate these pressures by automating administrative tasks and improving workflow efficiency, allowing clinicians to spend more time with patients while enhancing resource utilization.
3. Accelerating innovation and improving efficiency
   AI's benefits extend well beyond providers. Pharmaceutical companies can use AI to accelerate research and development, providers can improve operational efficiency, and payers can better identify high-risk patients and optimize care management. As a result, AI has the potential to drive productivity gains across the healthcare value chain.

Unlike many industries where AI’s primary impact may be disruption, healthcare has the opportunity to combine strong secular demand growth with significant productivity gains.

This creates an unusually attractive combination: AI could accelerate the pace of healthcare innovation while also helping the sector respond more efficiently to rising demand.

Another encouraging sign is the recovery in healthcare capital markets.

Biotech financing improved during 2025, follow-on activity increased, IPO markets resumed, and healthcare M&A accelerated as large pharmaceutical companies sought to replenish their pipelines ahead of patent expirations.

Biotech secondary offering activity by quarter (2022-2026) (USD billion)

While activity remains below prior-cycle peaks, the trend is notable. Improving access to capital supports clinical development, accelerates innovation, and signals growing investor confidence in the sector's long-term growth prospects.

Biotechnology is often one of the most sentiment-sensitive areas of healthcare, responding quickly to changes in investor confidence, capital availability, and expectations for future innovation. As a result, biotech performance can provide an early indication of broader shifts within the sector.

Recent strength suggests that sentiment is improving. As concerns around drug pricing, reimbursement, and government agency stability become more manageable, capital is returning to innovation-driven areas of healthcare.

Historically, biotech recoveries have often coincided with broader improvements in healthcare sentiment. If that pattern holds, recent outperformance may indicate that investors are becoming more willing to reward healthcare growth once again.