Healthcare stocks have gained 23% over the past 12 months, outpacing the S&P 500 Index's 15.7% return. The sector bounces back after a four-year slump caused by a biotech bubble burst in 2021, rising interest rates in 2022, drug pricing uncertainty, and pandemic-related supply and demand problems.
Three trends now drive healthcare stocks higher. First, new drugs show dramatic results. Revolution Medicines' Rasonque, a pancreatic cancer pill approved recently, more than doubles overall survival to 13.2 months versus chemotherapy. Moderna and Merck's skin cancer treatment reduced recurrence or death risk by 49% compared with Keytruda alone in early trials.
Second, mergers and acquisitions are accelerating. Drug companies face their "biggest patent cliff ever" starting in 2028 through 2032, when exclusive rights expire and generics enter the market. Companies made 26 biotech deals in 2025; the count topped 50 by midyear 2026. Eli Lilly acquired more businesses in the first half of 2026 than in all of 2025.
Third, Chinese biotech firms now partner with U.S. and European companies. Kailera Therapeutics licensed a weight-loss drug from Jiangsu Hengrui Pharmaceuticals and raised $625 million in an April 2026 public offering.
Analysts project healthcare sector earnings growth of 21.9% year-over-year in 2027, beating every sector except technology. Biotech earnings are expected to grow 47.7%. The S&P 500 is projected at 15.1%.
For investors, biotech cycles last four to five years with extreme swings. The sector requires patience since drug development takes over a decade, though artificial intelligence may halve that timeline. About 90% of therapies under development fail to reach market.
Six funds offer exposure. The State Street SPDR S&P Biotech ETF (XBI) tracks 147 biotech stocks, mostly small and midsize firms, with a 12-month return of 58%. The Virtus Biotech ETF (BBP) holds 65 equally weighted small and midsize firms with at least one FDA-approved drug and a 10-year annualized return of 12.2%. The Fidelity Select Biotechnology Portfolio (FBIOX), managed by Rajiv Kaul for nearly 21 years, has outpaced the S&P Biotechnology Select Industry Index over the past five, 10, 15 and 20 years.