Healthcare Beats Tech by Record Margin as Market Shifts

Investors are shifting money away from tech stocks, causing healthcare to pull ahead by a wide margin. Over the past six months, healthcare stocks beat tech stocks by 35.6 percentage points. That is the largest lead for the healthcare sector in 25 years.

Data from The Kobeissi Letter shows that healthcare stocks surged 31.7% over this period. Meanwhile, technology stocks slipped 3.9%. This represents a big reversal from early June, when tech held a 45.6-point lead over healthcare.

Past performance of financial market sectors is no guarantee of future returns.

Doubts Over AI Drive Capital Into Healthcare

The market shift began in late spring as confidence in artificial intelligence trades started to cool down. According to Bloomberg reports, the S&P 500 Healthcare Index grew by about 23% between late April and October 26.

This sector gain outpaced every other industry in the market. Leading drugmakers driving the rally included Eli Lilly, AbbVie, and Johnson & Johnson. Goldman Sachs also advised investors who were cautious about AI to consider reallocation into healthcare in October.

The performance gap broadened significantly through October. Morningstar reported that its US technology index dropped 6.62% during the month. In contrast, its healthcare index gained 8.82%.

Selling pressures in tech deepened further in November. On November 5, the Nasdaq plunged 5.52% amid fears of a slowdown in data-center spending. Around the same time, healthcare insurers and hospital operators rallied following political developments as Democrats won control of Congress.

Comparing Current Trends to Historical Cycles

Healthcare has rarely achieved this level of dominance over technology this century. Historical analysis from The Kobeissi Letter highlights only one period with a larger gap: the aftermath of the dot-com bubble collapse.

• Dot-Com Burst: Healthcare's lead reached a record high of 48.5 points.
• 2008 Financial Crisis: The sector lead topped out at 22.9 points.
• 2022 Bear Market: Healthcare led by 21.2 points.
• Current Market: Healthcare leads by 35.6 points.

Research from MSCI shows that from March 2000 to September 2002, US tech and communications stocks fell by nearly 80%. The rest of the market dropped 22% during that downturn.

However, MSCI noted an important distinction between the two eras. Today's leading tech companies remain highly profitable with strong profit margins, unlike many speculative firms of the dot-com era.

Three Factors That Could Shrink Healthcare's Lead

While healthcare has surged ahead, analysts note three potential risks that could narrow the gap between the two sectors.

1. Valuation Concerns

Following its strong rally, Morningstar now ranks healthcare as the third most overvalued sector in the US market. Higher valuations can limit future upside if price increases outpace fundamental business growth.

2. Mixed Corporate Earnings Results

Sector performance remains closely tied to quarterly earnings reports. For example, Johnson & Johnson reported disappointing October results, which led to the healthcare sector's weakest weekly performance in over a month.

3. Tech Rebound Potential

The tech sector continues to show strong recovery capabilities. Tech stocks rose 2.5% on November 9 as part of a broad market rally across all S&P 500 sectors.

What This Means for Fund Investors

This sector rotation has noticeable effects on market index funds. Traditional capitalization-weighted index funds give heavy weight to mega-cap tech stocks, whereas equal-weighted funds distribute weight evenly.

In October, the standard cap-weighted S&P 500 index declined by 0.9%. Meanwhile, the equal-weighted version of the S&P 500 rose by 5%. If healthcare maintains its performance lead while tech struggles, tech-heavy funds may continue to face performance headwinds.