Drug Pipeline Wins State Street Over on Healthcare

State Street Investment Management is turning positive on healthcare stocks after nearly a year of caution. The firm’s Q3 2026 sector outlook upgraded healthcare from neutral to positive. That marks the sector’s return to State Street’s list of favored trades.

Key Takeaways:

• Healthcare earnings could jump to 19.3% growth by 2027.
• Institutional investors remain underweight the sector despite recent buying.
• Valuations sit at their cheapest level in 15 years.

Healthcare’s forward earnings multiple relative to the broader market has fallen to its bottom quintile over the past 15 years, according to the report. The sector’s earnings are projected to grow 19.3% in 2027, the second-highest rate of any sector behind technology.

This upgrade follows a stretch of underperformance tied to drug-pricing uncertainty and slower medical procedure volumes. Many of those risks already appear priced into current valuations, State Street said.

Investors can access this favored sector through the State Street Health Care Select Sector SPDR ETF (XLV). Institutional flows into the fund category are near a five-year high over the past month, according to the report.

That renewed interest comes from a low starting point. Health care remains underweight in many institutional portfolios, the report said. That leaves room for further buying if earnings trends hold up.

See more: Not Just Tech: Invest in Innovation With Healthcare

For investors looking for income alongside that exposure, State Street also offers the State Street Health Care Select Sector SPDR Premium Income ETF (XLVI). The actively managed fund invests in shares of XLV and sells call options against it to generate additional income, according to the fund’s fact sheet.

XLVI’s underlying exposure spans pharmaceuticals, health care equipment and supplies, biotechnology, health care providers and services, and life sciences tools and services, per the fact sheet. The fund carries a gross expense ratio of 0.35%.

Biopharma Breakthroughs Fuel the Healthcare Case

Drug development is behind much of State Street’s optimism. Next-generation obesity treatments are showing weight loss along with improvements in heart-related risk factors, the report said.

Alzheimer’s research is progressing too, with new methods aimed at helping drugs cross into the brain more effectively. Early gene-editing data also point to lasting reductions in cholesterol, according to the report.

Cancer research added to the momentum. Presentations at the American Society of Clinical Oncology’s 2026 meeting covered progress in early-stage breast cancer and non-small cell lung cancer. Pancreatic cancer research also advanced, per the report.

Managed care, a drag on the sector for months, is showing signs of steadying too. Growth in physician visits and medical procedures is no longer accelerating, State Street said, easing pressure on insurer margins.

Risks haven’t disappeared. Policy uncertainty around drug pricing and managed care reimbursement remains an overhang, according to the report. Demand for medical technology also stays soft as procedure growth normalizes.

Earnings growth for 2026 sits at just 2.6%, according to the report. The bigger jump comes in 2027, when biopharma innovation and steadier managed care trends could push growth above 19%.

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