I’ve been analyzing data to track stock market sector trends since I entered the business in 1997. My first job was as a research assistant for an independent research firm that provided sector and industry money flow research to mutual and hedge fund managers. Eventually, I became a partner before leaving and creating my own proprietary stocks and sector ranking tool in 2003.
For years, money managers have used my research to identify new stock ideas and inform their decisions on whether to overweight or underweight sectors, industries, and stocks. My model, which is still available at Limelight Alpha, is still hard at work analyzing data. This summer, it highlighted a subtle shift toward healthcare in the early days of what’s proven to be a durable rally.
Limelight Alpha Sector Ranking (December 27 2025):
The ranking reflects the highest-scoring to the lowest-scoring sectors by score as of 12/27/2025. Higher-scoring sectors have positive fundamental, money flow, and momentum trends.
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The performance of healthcare stocks largely lagged until the summer. Since appearing near the top of the large-cap sector ranking in June, it has not only been one of the stock market’s best performers but also outperformed the technology sector.
Unless you’re living under a rock, you’re well aware of the gains in technology (and own a lot of it). Since ChatGPT’s launch in 2022, investors have poured into technology stocks, such as Nvidia, thereby increasing the technology sector’s S&P 500 weighting, while shunning healthcare stocks, which has led to a decline in its exposure in the index.
As a result, investors have likely found themselves owning a significant number of technology stocks heading into 2026, but too few healthcare stocks — something investors may want to consider as they think about what’s next for the stock market now that we’ve entered the New Year.
Healthcare stocks have been rallying since June 2025.
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Diversification isn’t a bad thing, and healthcare could be the sector to target in 2026
Technology stocks rally has lifted the sector to 34.4% of the S&P 500 index. However, if you include communication services, which include tech stalwarts like Meta and Alphabet, the figure surges to 45%. Toss in Amazon, which lives in consumer discretionary, and the figure climbs closer to 50% — a level high enough to be reminiscent of the height of the Internet boom, when technology comprised a significant portion of the benchmark index.
Related: Stocks wild ride in 2025 sets the stage for 2026
Nobody is ringing a bell to sell technology, and there are contrasts to the Internet boom that suggest an AI bust isn’t looming, including an absence of unused capacity. During the Internet boom, companies installed vast fiber optic networks before demand existed. This time around, all the data center capacity built so far appears fully subscribed.
“While often compared to late-1990s fiber, today’s data center cycle is fundamentally different, underpinned by long-term contracts with the world’s most advanced technology companies, and capability, power, and land emerging as key constraints on growth,” wrote KKR in a recent report. “Current absorption rates show no signs of overbuilding in the world’s most active market… in the longer term, we think demand should justify much of today’s data center build-out.”
Still, after three consecutive massive years for returns, investors shouldn’t be surprised if technology stocks take a break to backfill some gains at some point. If so, it could open the door for more rotation into other sectors that have been largely ignored, including healthcare.
Ranking data shows quiet shift toward healthcare
The sector model I developed aggregates individual scores on 1,600 stocks by industry and sector, and then ranks sectors by average score. The scores incorporate a range of fundamental and technical analysis data points, with a hefty focus on earnings and short and long-term momentum.
Those factors have increasingly been working in healthcare’s favor, despite what appears to be major headwinds from regulatory scrutiny over drug prices and health insurance premiums and coverage.
Related: Every major analyst’s S&P 500 price target for 2026
While those worries previously kept investors at bay, Wall Street appears to be increasingly warming up to the idea that recent big pharma deals with the White House will allow the industry to sidestep a broader, profit-margin-busting reckoning. The performance of major drugmakers has been solid, and not just the GLP-1 weight loss Giant Eli Lilly (LLY), which had already made a significant move due to surging demand.
Amgen (AMGN), Johnson & Johnson (JNJ), Merck (MRK), and others, including foreign stalwarts GlaxoSmithKline (GSK) and AstraZeneca (AZN), are all rallying since June.
Returns for select healthcare stocks since 6/30/2025:
Company
Symbol
Return 6/30 – 12/31/2025
Illumina
ILMN
37.47%
Natera
NTRA
35.60%
Johnson & Johnson
JNJ
35.48%
Merck
MRK
32.97%
AstraZeneca
AZN
31.55%
GSK ADR
GSK
27.71%
Amgen
AMGN
17.23%
Bristol Myers Squibb
BMY
16.53%
It’s not just the big players with established blockbusters either.
Biotech, which has been mostly miss rather than hit over the past decade, has also put on a show. We’ve seen biotech M&A activity increase, and money managers and investors seem to be increasingly recognizing that if regulatory fears are overpriced into stocks, there could be bargains, especially as funding costs drop, given that interest rates are retreating and strong markets offer access to capital.
Since June, the iShares Biotech ETF (IBB) is up 33.4% and the SPDR S&P 500 Biotech ETF (XBI) is up 35.4%. For perspective, the SPDR Technology ETF (XLK) is up 13.7% and the SPDR Healthcare ETF (XLV) is up 14.9% over the same period.
Is it too late to buy healthcare stocks?
I’ve spent more than my fair share of time tracking healthcare and have written thousands of stories on healthcare stocks. I was also the host of Motley Fool’s popular Industry Focus Healthcare podcast for years before joining TheStreet.
While anything can happen, historically, healthcare performs best when the economy is in the late stage of the business cycle, and when it becomes rocky, investors seek relative safety.
Fidelity.
The economy is doing fine, given that GDP is tracking 3% for Q4, according to the Atlanta Fed’s GDPNow tool. But Wall Street expects GDP growth to slow once a flood of tax refunds recedes, suggesting that as we push more deeply into the year, worries may emerge, particularly ahead of mid-term elections, providing a tailwind for a flight to safety trade.
For now, interest in healthcare stocks is due mainly to:
- Portfolio rebalancing to normalize weights.
- Diversification to play some defense after a big multiyear rally.
- Growing optimism that regulatory risks are overblown.
- Rising merger & acquisition opportunity.
- Falling interest rates improve income statements by lowering interest expense.
While healthcare’s rally may stall at any point, the sector is entering 2026 with momentum that, in my view, is strong enough to warrant exposure in my portfolio. The relative strength index for the XLV is 54.3. Overbought is generally considered to be a reading above 70, suggesting the basket isn’t currently overbought. The RSI for the XBI ETF is 52.4.
Todd Campbell owns Illumina, Johnson & Johnson, and Amgen shares.
Related: Goldman Sachs resets bets on US economy in 2026
