Sector Market Perspectives: Q3 2026
The macro narrative has shifted from one dominated by acute geopolitical shocks and supply-driven inflation toward a more stable—but still uncertain—environment, with markets increasingly looking through near-term headlines and refocusing on underlying economic and earnings fundamentals.
US Sector Strategy & Research team
We see the US macro backdrop remaining resilient over the next 6- to 12-month time horizon, despite the lingering upside inflation risk and monetary policy uncertainty. Growth expectations have moderated at the margin but remain solid, supported by a stabilizing labor market, ongoing CapEx strength, and fiscal policy support from the One Big Beautiful Bill Act (OBBBA).
Resilience is also evident in corporate profits. In the latest earnings season, S&P 500® companies delivered the highest earnings growth since Q4 2021, with an above-average number of companies issuing positive earnings guidance for Q2.1 Earnings growth is broadening meaningfully, with a majority of S&P 500® sectors expected to deliver double-digit growth in 2026—even as market performance has concentrated in Tech over the past three months—underscoring a disconnect between improving fundamentals across other sectors beyond Tech and narrow sector leadership.2
Beneath the surface, however, resilience is becoming more uneven across consumers. Despite aggregate household balance sheets remaining healthy and supported by record wealth levels, underlying income dynamics have softened. Real disposable income has declined year over year, and lower- and middle-income consumers face greater inflation pressure.3 This deterioration is beginning to weigh on consumption growth, which is now expected to decelerate toward 2.0% from 2.6% last year.4
Outside of consumers, cyclical momentum continues rebuilding with strong industrial activity. The manufacturing-led upturn highlighted last quarter was not derailed by the recent US-Iran war-induced supply disruptions. Recent data confirm a broad-based recovery in production and new orders, suggesting that the US is emerging from a multi-year manufacturing slowdown.5 This resilience reflects several supporting factors including less price-sensitive AI CapEx, OBBBA tax incentives for capital investment, inventory rebuilding, and easing trade uncertainty.
Looking ahead, a backdrop of resilient growth and improving manufacturing momentum creates conditions for broader sector participation. A sustained normalization of energy supply through the Strait of Hormuz may ease inflation pressure, giving more room for the Fed to step back from its hawkish stance, and setting the condition for further broadening. Therefore, sector leadership is likely to expand beyond the dominant AI infrastructure and mega-cap technology trade toward more attractively valued cyclical sectors that stand to benefit from increasing CapEx and industrial recovery.
While adding some balance to our positioning this quarter across the broader sector landscape, we remain constructive on Technology and other AI beneficiaries, and see strengthening opportunities in Industrials, Materials and Financials sectors. We maintain a more cautious stance on consumer sectors given the evolving demand backdrop and emerging pressure on pricing power. Within defensives, Health Care has seen tailwinds strengthen that may offer relative valuation support and portfolio resilience in the event of labor market weakness or AI air pockets, like AI monetization shortfalls or political backlash.
Figure 1: Summary of sector market perspectives
| Sector | View | Changes and Rationale |
| Technology | Positive | We remain positive as broad-based earnings upgrades and rising AI demand provide fundamental support despite some near-term positioning risks. |
| Communication Services | Neutral | We are downgrading to a neutral view as strong growth in interactive media is increasingly offset by rising AI CapEx, constrained free cash flow, and uneven sector momentum. |
| Financials | Positive | We are upgrading our view from neutral to positive as the Iran war disruption to the expansionary business cycle fades and regulatory tailwinds and valuations remain supportive. |
| Real Estate | Netural | We are upgrading our view to neutral as stabilizing fundamentals in pressured subsectors and attractive valuations offset continued rate headwinds. |
| Consumer Discretionary | Negative | We maintain a negative view as stretched consumer spending, weak real income growth, and elevated interest rates weigh on the growth outlook. |
| Consumer Staples | Negative | We maintain a negative view as margin pressures, limited pricing power, and stretched valuations in bellwether Staples’ retailers persist. |
| Industrials | Positive | We remain positive as AI‑driven investment, pro‑CapEx fiscal policy, and defense spending continue to support broad-based growth. |
| Materials | Positive | We maintain a positive view with rising manufacturing activity, structurally higher demand for industrial metals, and strong earnings momentum, with still reasonable valuations. |
| Energy | Neutral | We are downgrading to a neutral view with the more balanced supply-demand outlook following the interim peace deal between the US and Iran, coupled with the sector’s strong year-to-date gains that could limit further upside potential. |
| Utilities | Neutral | Although we remain constructive on long-term demand drivers, affordability pressures and rate volatility warrant a downgrade to a neutral stance for the near term. |
| Health Care | Positive | We are upgrading to positive given attractive valuations, improving managed care trends, and continued strong biopharma innovation. |
Source: State Street Investment Management, as of June 26, 2026. Green shading indicates positive views. Orange shading indicates negative views.
Technology
Quarterly perspective: Despite near-term positioning risks, we remain positive on Technology as broad-based earnings upgrades and rising AI demand provide fundamental support and multi-year structural growth opportunities.
Technology earnings remain strong and broad-based, with 2026 and 2027 earnings growth estimates revised higher across all six industries since March,6 driven by continued strong momentum in the AI infrastructure build-out and the emergence of agentic AI. Since March, consensus estimates for 2026 CapEx by major hyperscalers have risen 15%, reaching $772 billion, while nearing $1 trillion for 2027.7 This is driving outsized earnings growth in semiconductors, where earnings are expected to grow 86% in 2026, and 2027 expectations have nearly doubled to 44% since March.8
Meanwhile, as AI development evolves from training large language models to deployment of autonomous, multi-step agentic systems, it increases workload complexity and extends growth opportunities beyond computational power to the full tech stack. This dynamic has created meaningful pricing power for companies in advanced chip packaging, memory, data storage, and networking. Computer storage businesses (e.g., hard disk drives) are expected to remain a key beneficiary with their average gross margins increasing from the mid-teens in 2023 to a consensus estimate of 64% for 2027.9
Software has also shown stabilization following a Q1 re-rating. Accelerating cloud computing revenues and large commercial backlogs reported during the Q1 earnings season are boosting investor confidence about the return on investment (ROI) of hyperscalers’ elevated CapEx. Early evidence also suggests that AI-driven demand has benefited software companies that integrate AI with enterprise data, provide solutions that offer insights into agentic workflows, or provide robust cybersecurity. However, volatility may persist as the debate on the industry incumbents’ terminal value evolves, shaped by new entrants and how effectively existing players integrate the new technology into their business and operating models.
After a 40% rally in Q2 of the S&P 500® Information Technology Index,10 positioning in the sector became crowded. Tech ETFs have attracted $38 billion inflows year to date, while institutional investor holdings sit near a five-year high.11 The skewed positioning could serve to exacerbate the sector’s volatility if the pace of AI monetization disappoints. But compressed valuations provide fundamental support, trading well below their five-year median on an absolute and relative basis.12
Broadly speaking, we see Tech continuing to benefit from a durable growth cycle where rising AI investment and adoption persist in anchoring the sector as a structural growth leader.
Communication Services
Quarterly perspective: We are downgrading Communication Services to neutral. Strong growth in interactive media, resilient digital advertising demand, and AI monetization remain supportive, but rising AI CapEx, new debt and equity issuance, concentrated leadership, and uneven sector momentum are creating a more balanced near-term risk/reward.
Interactive Media continues to drive the lion’s share of the sector’s growth in 2026, supported by strong digital advertising demand and AI-driven enhancements to ad targeting and user engagement.13 However, the growth outlook outside of interactive media has weakened since March.14 Market performance reflects this imbalance; equal-weighted sector returns are negative year to date (-9.6%), while the market-cap weighted index has a positive total return of 4.2%,15 supported by a large weight in interactive media companies—highlighting the narrow breadth of leadership.
While interactive media fundamentals remain solid, the tension within the segment lies in the interplay between AI-driven revenue opportunities and rising capital intensity. Large platform companies reported positive AI monetization developments during Q1 earnings calls, including improved ad targeting and placement for Meta,16 and a 40% quarter-on-quarter growth in paid monthly active users for Alphabet’s Gemini Enterprise offering.17 Meanwhile, these gains are increasingly accompanied by a step-up in CapEx along with new debt and equity issuance, as firms invest aggressively in infrastructure to support AI development and deployment.
While elevated capital spending reflects a strategic commitment to long-term growth, it also introduces greater near-term uncertainty over margin sustainability and the timing of return on investment, particularly as earnings growth is expected to decelerate meaningfully to 4.3% in 2027, compared to 35% in 2026.18
Importantly, we do not see a deterioration in the sector’s long-term structural drivers. Digital advertising, AI integration, and cloud-linked growth opportunities remain firmly in place and are likely to continue supporting earnings expansion over time. However, the combination of increasingly concentrated leadership and rising CapEx intensity for growth drivers suggests the sector’s risk-reward has become more balanced.
Financials
Quarterly perspective: As the Iran war enters a resolution phase and downside risks around growth and credit have proven more contained than the market expected, we are upgrading our view for the Financials sector from neutral to positive.
The macro backdrop is incrementally more constructive for Financials. While the path for rate policy remains uncertain, economic activity and corporate profits have held up, supporting business credit performance and loan growth—largely reducing fears of a near-term downturn.
Positive steps continue toward resolution of the US-Iran war, which support the expectation of lower energy prices and declining inflation. This potentially helps reduce the likelihood of the rate hike scenario that the market is still pricing in, or at least keeps rate levels unchanged. In fact, our economics team still see the potential for the Federal Reserve to cut rates rather than hike,19 which could steepen the yield curve and support loan growth—creating a sturdier foundation for bank profitability. Importantly, any gradual steepening in the yield curve from current levels would provide meaningful upside to banks’ net interest margins, shifting rates from a headwind to a modest tailwind.
Earnings resilience across the Financials sector has also strengthened the investment case. The sector continues demonstrating stable credit quality and solid operating momentum, with improving trends in loan growth and capital markets activity.20 Investment banking activity is beginning to improve at the margin, with the pick-up of IPOs and the latest earnings season commentaries continuing to highlight the rebound in M&A and capital markets activity, which support a gradual normalization to fee income over the coming quarters. At the same time, cost discipline and benign credit losses are providing a more durable earnings base.
Valuations remain a key pillar of the upgrade. Financials continue to trade at a meaningful discount to the broader market, with relative multiples near multi-year lows.21 This discount persists despite stable fundamentals and improving earnings visibility—a disconnect suggesting the sector is still priced for a more adverse macro-outcome than appears likely.
Regulatory developments also remain supportive. The implementation of the Enhanced Supplementary Leverage Ratio (eSLR) and proposed adjustments to capital rules (including the Basel III Endgame and G-SIB frameworks) could lower capital requirements for large banks and unlock incremental lending capacity. This, in turn, has the potential to support returns on equity through both balance sheet growth and higher shareholder distributions. Increased clarity on the final regulatory framework later this year could act as a potential catalyst for Financials.
While risks remain, they appear more manageable. Private credit concerns have not translated into broader systemic stress, and exposures remain contained within the overall credit system. Similarly, while deposit competition and funding costs are still elevated, these pressures are increasingly well understood and have largely been incorporated in current expectations. The absence of any meaningful deterioration in credit conditions has reduced the likelihood of downside scenarios that previously weighed on sentiment.
Overall, the risks to Financials are no longer intensifying, and appear increasingly balanced by potential upside drivers amid a cyclical upswing. With downside risks moderating and positive catalysts becoming more visible, we believe Financials is better positioned to potentially outperform over the next 6-12 month time horizon.
Real Estate
Quarterly perspective: Despite continued rate uncertainty, we are upgrading our stance on Real Estate to neutral as constructive supply-demand dynamics in major segments and stabilizing fundamentals across previously pressured REIT subsectors support a more balanced risk-reward profile.
Real Estate has held up well since Q2, even as US Treasury yields rise on reduced rate cut expectations22—a backdrop that would typically add pressure to the sector by increasing financing costs.
The sector’s performance resilience has been partially supported by constructive supply-demand balance in senior housing and data centers, as well as retail and industrial REITs. Data center REITs are offering strong demand visibility from AI, while senior-housing demand is exceeding constrained supply.23 At the same time, retail REITs are supported by healthy tenant demand, high occupancy, and limited new supply, and industrial REIT demand appears to be reaccelerating helped by e-commerce, advanced manufacturing, and data-center supply-chain needs.24
Stabilized fundamentals across several previously challenged subsectors provide further support. US wireless carrier consolidation appears largely complete, with Q1 updates from major telecom tower REITs suggesting the worst of the merger-related lease cancellations may be nearing an end.25 Office REITs’ rolling four-quarter excess net demand turned positive for the first time since 2019,26 as companies that cut space after COVID now appear to be playing catch-up. The rebound in demand is also showing up in the leading indicator of future leasing activity with the VTS Office Demand Index—which tracks unique new tenant requirements of office properties in the US—reaching its highest post-pandemic level in Q1.27
Despite recent performance strength, the sector’s valuations are still trading at a 16% discount to the broad market, well below the historical 5% average discount.28 The depressed valuations continue reflecting rate headwinds for the sector, but should rate cuts come back in play there is the potential for outperformance driven by multiple expansion. Given the continued uncertainty with the rate outlook, we are not yet shifting to an outright bullish stance on Real Estate. A combination of improving fundamentals and performance resilience supports our move to neutral positioning.
Consumer Staples and Consumer Discretionary
Quarterly perspective: We remain negative on both Consumer Staples and Consumer Discretionary as a fragile consumer backdrop continues to limit demand, pricing power, and the growth outlook for both sectors.
The consumer backdrop appears resilient but is increasingly fragile beneath the surface. Higher inflation is weighing on real income growth, which declined year over year at the end of April for the first time since 2022.29 Spending has outpaced income growth for 23 consecutive months—the longest stretch on record, resulting in the lowest savings rate since mid-2022.30
Meanwhile, elevated interest rates are adding financial strain on consumers, evidenced by rising delinquencies in auto and credit card loans.31 Lower personal savings and weaker income growth combined with the added financial stress from higher prices and interest rates are likely to weigh on consumer spending for the remainder of this year.
Despite the strain, our economist team is still expecting 2% growth in household spending for 2026,32 but the growth is likely to be uneven across socioeconomic groups—and sectors. High-income households remain supported by strong balance sheets and investment asset gains, while higher exposure to inflation in essentials disproportionately weighs on lower- and middle-income consumers33—reinforcing downside risks to consumer spending, particularly in discretionary categories.
These pressures are translating into a more challenging fundamental backdrop for consumer sectors. Within Staples, elevated input and logistics costs along with intensifying private label competition are pressuring margins, particularly in packaged food and mass market segments. While the sector may continue to show relative resilience with lower priced trade down dynamics employed by both businesses and consumers, the sector is likely to face softer volume growth and more limited pricing power.
The Discretionary sector is broadly more exposed to softening demand as consumers prioritize and pare back spending on non-essentials. While 2026 earnings growth has been revised higher since March to 14.4%, upgrades have been narrow and largely driven by Amazon.34 Excluding Amazon, earnings revisions have been modestly negative, with a below market EPS growth rate of 8% this year—among the weakest across sectors.35 This divergence points to a more fragile underlying earnings backdrop than headline figures suggest.
Valuations offer limited support. Despite strong competitive positioning, we remain cautious on bellwether Staples’ retailers given elevated valuations which are trading ~1.5x the forward P/E multiples of the Tech sector, with less than half of Tech’s projected earnings growth.36 While Discretionary’s relative forward P/E valuation is sitting near its five-year bottom quintile, its 25% premium over the broad market alongside a weaker growth outlook is not currently offering a compelling entry point.37
Industrials
Quarterly perspective: We remain positive on Industrials as AI driven infrastructure investment, pro-CapEx fiscal policy, and defense spending continue to support broad-based strength across the US industrial base.
Policy tailwinds support a broadening industrial revival, with pro-CapEx incentives, manufacturing reshoring, and easing trade uncertainty underpinning investment and industrial production activity. Improving new orders point to strong underlying demand, while inventory-to-sales ratios fell to four-year lows, creating a restocking impulse.38
As inventory remains low, industrial production is trending higher with firms scaling output to meet both restocking needs and sustained order flow.39 As a result, ISM Manufacturing PMI accelerated to 54.5 in May—its highest level in the past four years—but remains below past cycle peaks, signaling there may be more room to run.40 The sector’s broadening growth is also reflected in 2026 and 2027 growth expectations, with nine of the 12 underlying industries for the sector expected to post double digit growth in 2027, compared to six industries in 2026.41
Meanwhile, hyperscalers continue to raise CapEx plans, with 2026 projections up 15% since March to reach $772 billion, and 2027 projections approaching $1 trillion,42 reinforcing the durability of the AI build-out cycle. A substantial portion of this spending is directed toward physical infrastructure that supports demand across a wide industrial base including power, cooling, and construction capabilities required for increasingly complex data center facilities.43
At the same time, the growth outlook for the aerospace & defense industry remains positive despite their recent underperformance. While concerns regarding FY27 defense budget approval have weighed on defense stock sentiment, and higher oil prices clouded the outlook for commercial aerospace demand, production ramp-up and backlog visibility remain strong supported by aircraft orders nearing a 10-year high.44 Moreover, the House Appropriations Committee spending bill, which is only slightly below the base discretionary request, supports elevated defense spending—with defense capital goods orders reaching the second-highest level on record.45
Industrials’ stretched forward P/E valuations are less concerning given that we are still in the early innings of the industrial revival. While the sector’s elevated forward P/E suggests markets are pricing in peak earnings and subsequent normalization, this contrasts with more compressed trailing multiples that reflect strong recent earnings and broad-based positive surprises.46 This divergence points to potentially conservative forward expectations, and with structural tailwinds supporting a more durable earnings outlook, ample scope remains for upward revisions and a gradual easing of valuation pressure.
Materials
Quarterly perspective: We maintain a positive view on the Materials sector supported by resilient structural demand for key industrial metals, rising US manufacturing activity, and strong earnings momentum in key underlying industries.
Tactically speaking, the Materials sector has been impacted by the US-Iran war and the resulting pause in the metals and mining industry’s performance, as precious metals such as gold consolidated after a historic rally.47 Higher real yields and a stronger US dollar are creating tactical pressure, but structural demand remains intact driven by rising sovereign debt, monetary debasement, and continued active central bank allocation. Given the current gold price ~$4000/oz,48 and our Gold Strategy team’s gold price outlook for the end of this year (base case $4,750-$5,500/oz),49 we see upside potential for spot prices and miners’ earnings.
Structural demand drivers in industrial metals continue to anchor investor conviction in the sector. Ongoing investment in electrification, grid infrastructure, and AI-related power demand is driving a sustained favorable outlook for metals such as copper and lithium, where demand is proving more durable than in prior cycles. This comes amid tightness in copper supply and increasing demand for lithium, a critical input for battery storage that is a key component of the AI infrastructure build-out. This shift is reinforcing the view that parts of the Materials sector are becoming less purely “cyclical,” and more frequently tied to durable growth themes that support pricing resilience and margin stability.
At the same time, the continuing rise of US manufacturing PMI demonstrates an amplification of the US industrial revival, with the Materials sector benefiting during such expansion periods. While US chemical prices may begin normalizing following the resolution of supply disruptions caused by the Iran war, we see a stable and potentially higher established floor for prices given rising US manufacturing activity is likely to bolster demand for the chemicals needed in industrial production.
From a valuation perspective, the sector continues to offer an attractive entry point relative to its earnings outlook. Based on next-twelve-months price to earnings ratio, Materials screen favorably versus historical multiples, which is currently in the 46th percentile relative to its five-year history.50 Materials also maintains one of the stronger forward growth profiles across sectors, with a 40% CY 2026 estimated EPS growth, the third highest across sectors.51 Earnings momentum also remains strong, with EPS growth for 2026 and 2027 meaningfully revised higher since the end of Q1, driven by improvement in the chemicals and metal and mining industries.52
This combination of reasonable valuation and improved earnings prospects is reinforcing the sector’s attractiveness. Overall, the investment case for Materials is increasingly centered on structural themes in addition to the cyclical upswing, supporting our positive view.
Energy
Quarterly perspective: We are downgrading Energy from positive to neutral as the sector’s risk-reward has become more balanced following strong year-to-date gains and a sharp reduction in geopolitical risk.
Energy continues to offer diversification benefits for core equity portfolios given its high sensitivity to inflation and energy prices, and low correlation to the broad market.53 Despite the increased optimism of a US-Iran deal and the subsequent pullback in energy prices, Energy’s earnings growth for this year remains supported by a gradual normalization of flows through the Strait of Hormuz and strong demand from rebuilding the energy inventories, which now sit at their lowest level since 1990.54
In a more geopolitically fragmented world, the disruption risk to energy supplies remains higher than it was a year ago, which provides a higher floor for energy prices relative to the pre-conflict environment—a dynamic that continues supporting the sector’s free cash flow. In fact, the Energy sector is boasting the highest free cash flow yield across the 11 GICS® sectors at 8.4%, compared to the broader market at 3.5%.55
Despite the positives, the interim peace deal between the US and Iran has significantly reduced the tail risk of a prolonged energy supply disruption, displacing a key upside driver for Energy from three months ago. Meanwhile, limited demand upside exists over the medium term, which could drive the energy market back to balance as early as 2027 if the peace deal holds and Middle East export and production normalize in the next few months.
From a positioning perspective, investors’ exposure to Energy has significantly increased alongside the sector’s strong performance. Energy ETFs have attracted $11.9 billion inflows year to date—the second highest of any sector—and institutional holdings have increased to near the 65th percentile of their five-year range,56 leaving little room for further reallocation-driven upside.
While the Energy sector remains supported by a structurally higher geopolitical risk premium than existed a year ago, the more balanced supply-demand outlook coupled with the sector’s strong year-to-date gains limit its forward upside potential, supporting our neutral stance as we enter H2 2026.
Utilities
Quarterly perspective: We remain constructive on Utilities’ long-term demand drivers, but emerging policy and affordability pressures along with interest rate volatility support a more balanced near-term stance and a downgrading of our position from positive to neutral.
Utilities continue to benefit from secular demand drivers that support long-term earnings visibility. AI-driven data center expansion is accelerating electricity demand, while electrification trends across transportation, industrials, and residential sectors are expanding Utilities’ rate base opportunities. Meanwhile, ongoing investment in transmission networks and grid modernization reinforce the sector’s ability to deliver steady earnings growth. These dynamics support a durable above-trend growth outlook, with consensus estimates pointing to 9.4% earnings growth through 2027.57
However, the near-term environment is becoming more challenging, and the balance of risks has shifted. A backdrop of rising interest rates and emerging policy and affordability pressures is weighing on the sector’s relative appeal. With 10-year Treasury yields above 4.4%, Utilities’ current dividend yield of 2.8% is ~170 basis points lower than long-term Treasury yields, and well below its five-year average.58 This shift has made the sector’s income profile less competitive, particularly in the context of a resilient US economy and strong corporate profitability where investors tend to favor cyclical growth opportunities.
More importantly, with an onslaught of state level political races, electricity affordability is becoming a more visible headwind. In Pennsylvania, for example, Governor Shapiro has kept affordability front and center despite a decisive re-election advantage, placing greater scrutiny on the returns of utility companies while pressing companies to utilize lower-cost financing and better justify rate-base spending.59 The political narrative raises the risk that large-load projects could face heightened scrutiny to the extent they are seen as adding system costs or driving higher household bill pressures. While this does not necessarily imply immediate broad-based policy change given legal hurdles and governors limited executive authority, intensified political rhetoric in the lead-up to the midterm elections could put downward pressure on the sector’s valuations.
These dynamics are already evident in market performance. Since March, Utilities has been one of the weakest-performing sectors, despite little change in the underlying growth outlook.60 We believe this divergence between stable earnings expectations and declining valuations highlights a shift in investor sentiment, rather than a fundamental deterioration in the earnings outlook.
While the sector’s long-term growth drivers remain intact, we see increasing near-term headwinds from rising rates and political scrutiny around affordability—factors that are likely to weigh on investor sentiment and valuation in the near term. As a result, we are downgrading our stance from positive to neutral, reflecting a more balanced outlook between structural growth and cyclical pressures.
Health Care
Quarterly perspective: We are upgrading our view for Health Care to positive based on attractive valuations, improving managed care trends, and strong continued innovation in biopharma creating an increasingly attractive risk-reward profile.
Health Care’s outlook has improved meaningfully over the past quarter, supported by a clearer set of growth catalysts that could drive renewed investor interest. Recent clinical developments in multiple disease areas have boosted investor confidence in the sector’s innovation pipeline.
Next-generation obesity therapies have demonstrated not only robust weight loss but also clear improvement in cardiovascular risk factors.61 Alzheimer’s research is also advancing with new technologies aimed at helping drugs reach the brain more effectively,62 while early gene-editing data point to the potential for durable cholesterol reduction.63 And recent breakthroughs presented at the recent 2026 Annual Meeting of the American Society of Clinical Oncology (ASCO) reinforce accelerating innovation across high-impact disease areas, including early-stage breast cancer, non-small cell lung cancer, and pancreatic cancer.64 Although many advances will require further validation, the breadth of the current progress could help lift investor sentiment and support sector performance in the quarters to come.
Managed care, which has weighed on the sector for some time, is also showing early signs of stabilization. Recent data suggest utilization trends are normalizing, with growth in healthcare usage, including physician visits and medical procedures no longer accelerating65—a trend that supports a more favorable margin outlook and improving earnings visibility for managed care companies.
Institutional investors have taken notice of recent improvements in fundamentals, with one-month institutional flows near a five-year high.66 Combined with a current underweight position in institutional portfolios,67 the sector appears well positioned for a re-rating should fundamentals continue to improve.
As we move into H2, investors are likely to increasingly focus on the 2027 earnings outlook. Following a modest earnings growth expectation of just 2.6% in 2026, Health Care is currently projected to deliver the second-highest earnings growth across sectors in 2027—at approximately 19.3%—trailing only Technology.68
Policy uncertainty surrounding drug pricing and managed care reimbursement remains an overhang, while the demand backdrop for MedTech remains weak given continued normalization of procedure growth. However, in our view, many of these risks are already priced in. Health Care’s forward P/E valuation relative to the broader market has fallen to the bottom quintile for the past 15 years, reinforcing our view that this represents a potential buying opportunity at current levels.69
Overall, we believe the risk-reward profile for Health Care has become increasingly attractive. Historically depressed relative valuations, improving managed care fundamentals, and strong innovation across biopharma provide a compelling backdrop for the sector supporting an upgrade of our stance to positive.