Health Care Stocks Can Rip From Here
Health care stocks have been on a long-overdue tear recently...
You see, the sector has been out of favor for several years.
During the pandemic, most health care companies dropped what they were doing to focus on fighting COVID-19. Funding flowed in, and sales for many biotech and pharmaceutical companies spiked. Investors flocked to health care names in droves.
But as the world recovered, the pandemic turned out to be a one-time sales bump for many companies. Top-line growth crumbled, and many investors fled.
Health care stocks, measured by the Health Care Select Sector SPDR Fund (XLV), were basically flat for four straight years (from September 2021 to September of this year). But over the past couple months, they've shown signs of life.
XLV is up 20% since early August. The fund recently hit a new 52-week high...
As I (Jeff Havenstein) discussed in our October 15 issue, you want to buy the market when it makes a new high. New highs tend to lead to more new highs.
And several factors today are telling us to expect plenty of new highs for health care stocks...
First, health care's "relative valuation" seems to have finally bottomed.
The chart below measures the forward price-to-earnings ratio of the health care sector versus the S&P 500 Index. The lower the ratio, the cheaper health care is compared with the rest of the market.
As you can see, health care's relative valuation hit a low earlier this year, but it is beginning to recover...
You'll also notice that two similar prior bottoms led to multiyear rallies.
This tells us that plenty of upside remains for health care.
Another factor giving us hope is how well the sector has done lately. I mentioned earlier that health care is up 20% since early August. For comparison, the S&P 500 is only up 8% over the same period. We love to see this type of outperformance.
Health care's outperformance is also clear in the chart that Doc Eifrig and I shared with Retirement Trader subscribers on Monday. It's called a Relative Rotation Graph, and it plots both the relative strength of a sector and the momentum of that strength.
Relative strength tells us whether a sector is outperforming or underperforming a benchmark – in this case, the S&P 500 Economic Sectors Index. Higher values indicate greater relative strength.
The momentum of relative strength looks at whether that outperformance or underperformance is getting better or worse. A value above 100 means momentum is increasing.
Taken together, these metrics show not only where a sector is, but where it's going.
The graph is divided into four quadrants...
The "weakening" quadrant, in the bottom right, means the sector is outperforming, but its momentum is rolling over. This warns that a previous leader may be losing steam.
The "lagging" quadrant, in the bottom left, means a sector is underperforming, and its momentum is deteriorating. This typically isn't where you want to be, unless you're looking for deep contrarian setups.
The "improving" quadrant, in the top left, means a sector is still lagging, but its momentum is rising. Consider this the "early turn" quadrant.
Finally, the "leading" quadrant, in the top right, means a sector is beating the benchmark and momentum is still accelerating. These are the undisputed market leaders.
The rotation moves clockwise. If a sector is in the weakening quadrant, for example, it most likely won't be long before it moves to the lagging quadrant.
In the chart below, you'll see how several sectors have been performing week to week (represented by the dots). Health care is obviously a standout...
The health care sector has moved from lagging to improving – and soon it'll be in the leading quadrant. Again, this is where a sector is beating the benchmark, and its momentum is still accelerating.
And once health care lands in the leading section, we believe it can stay there for a while...
One reason is that fundamentals are strong. As you can see below, the health care sector delivered the strongest earnings compared with expectations in the S&P 500 last quarter...
Everything we're seeing today tells us health care can still rise from here.
Plus, in general, health care is a great sector to own. It's "defensive," meaning it can do well in just about any economic environment.
That's because people need medicine in both good times and bad. Even though consumer sentiment is terrible right now and folks are tightening their budgets, they'll cut back on other things before they stop ordering medicine or scheduling surgeries.
If you've been out of health care over the past couple years, I get it. It hasn't been easy to generate returns by owning these stocks.
But now is the time to consider increasing exposure to health care in your portfolio.
New highs are likely ahead.
What We're Reading...
- In case you missed my October 15 issue: "Happy Birthday, Bull Market... And Here's to a Couple More."
- Something different: Elon Musk lists his three most important ingredients for AI.
Here's to our health, wealth, and a great retirement,
Jeff Havenstein
December 3, 2025