JPMorgan maintained a constructive outlook on the healthcare sector in a note published Tuesday, describing the current risk/reward as attractive after an extended period of relative underperformance.
Strategist Dubravko Lakos-Bujas emphasized the qualities that make the sector compelling now. In his view, healthcare "offers a rare combination of durable growth, Technology-like profitability, attractive valuation and diversification benefits at a time when many investors remain heavily concentrated in the AI theme."
The firm argued that capital allocation over the past three years has been heavily skewed toward AI and related areas, leaving healthcare - one of the market’s largest and most persistent growth sectors - increasingly neglected.
JPMorgan pointed to measurable signs of that neglect. Since the launch of ChatGPT in 2022, the U.S. healthcare sector has underperformed the S&P 500 each year and suffered five distinct drawdowns exceeding 10% amid what otherwise has been a strong market rally. The sector’s index weight has dropped to about 9% from a peak near 16%, moving it from the second-largest sector to the fifth-largest by weight.
The bank attributed the sector’s weak sentiment to a variety of policy and positioning pressures. Specific concerns cited include drug pricing reform, reimbursement pressures, potential Medicaid cuts and broader policy uncertainty. JPMorgan also noted that healthcare has become a preferred funding short against crowded AI longs, a dynamic it described as producing one of the largest positioning resets in the sector’s history.
On valuation and earnings, the firm highlighted that healthcare remains relatively inexpensive on a historical basis - sitting in the 26th percentile versus the broader market - and that earnings growth is expected to accelerate materially in 2027. Those factors, JPMorgan suggested, point to an approaching, more sustainable inflection point for the sector.
The strategist added that a potential gridlock outcome in upcoming midterm elections could help alleviate some policy-related concerns. At the same time, he noted that expectations for upside from AI-driven productivity gains remain modest, leaving room for positive surprises.
Clear summary
JPMorgan reiterated a favorable view on healthcare, highlighting durable growth, strong profitability, attractive valuation and diversification benefits while noting prolonged underperformance, multiple drawdowns and a fall in index weight. Policy worries and sector positioning have dampened sentiment, but valuations and projected earnings improvement in 2027 support the bank’s bullish case.
Key points
- Healthcare combines sustained growth, Technology-like profitability and attractive valuations, per JPMorgan - impacting investors considering sector allocation and diversification.
- The sector has underperformed the S&P 500 annually since the launch of ChatGPT in 2022 and experienced five drawdowns over 10%, shifting its index weight from near 16% to about 9%.
- Policy concerns and crowded positioning related to AI have pressured sentiment; JPMorgan sees the potential for earnings to accelerate materially in 2027.
Risks and uncertainties
- Regulatory and policy risk - concerns about drug pricing reform, reimbursement pressures and potential Medicaid cuts could continue to weigh on healthcare-focused companies and REITs tied to medical facilities.
- Market positioning risk - healthcare has been used as a funding short against AI longs, and continued crowded trades or positioning shifts could extend volatility in the sector.
- Political outcomes - upcoming midterm election results may affect policy risk; while JPMorgan suggests gridlock could ease concerns, election uncertainty remains a factor for investors.