Healthcare stocks have risen 23% over the past six months, leading the S&P 500; earnings reports from giants such as Eli Lilly (LLY.US) will determine whether the rally can continue.

As investor confidence in artificial intelligence (AI)-related stocks has been shaken, Wall Street funds are accelerating their flow into the healthcare sector in search of shelter from technology-stock volatility. Since the end of April, the S&P 500 Healthcare Index had risen about 23% cumulatively through Monday's close, not only outperforming the S&P 500 but also surpassing all other sectors, including technology stocks, which had previously been strong, and energy stocks, which were lifted by the Iran war. This rally in healthcare stocks has been driven mainly by large pharmaceutical companies such as Eli Lilly (LLY.US), AbbVie (ABBV.US) and Johnson & Johnson (JNJ.US). As concerns heat up over returns on AI investment, the massive capital expenditures of technology companies and related financing risks, the healthcare sector is regaining investor favor. Matt Orton, chief market strategist at Raymond James Investment Management, said healthcare stocks are being viewed by the market as an "anti-AI trade." When investors feel uneasy about the outlook for AI spending and related technology stocks come under selling pressure, the healthcare sector often shows relatively strong resilience. Fund flow data further confirm this trend. According to data compiled by Baird Strategas through October 19, healthcare exchange-traded funds (ETFs) attracted about US$4 billion in cumulative inflows over the past 65 trading days, outperforming all other industry sectors. By contrast, technology ETFs saw about US$6 billion in net outflows over the same period, the most among all sectors. Orton noted that until about six months ago, healthcare stocks were still clearly lagging the broader market, making their valuations relatively more attractive. As investors begin to reduce portfolio risk, the healthcare sector has gradually become one of the main destinations for funds seeking safety. The recent sharp volatility in technology stocks has further accelerated this shift. Earlier, cloud computing services provider CoreWeave (CRWV.US) saw its shares plunge after a debt-related metric rose to a level typically regarded as financial distress, triggering market worries about financing risks in AI infrastructure. As a result, technology stocks posted their worst weekly performance since Trump introduced tariff policies in April 2025. Meanwhile, the healthcare sector extended a streak of gains lasting several weeks. Brian Mulberry, chief market strategist at Zacks Investment Management, said the market volatility triggered by CoreWeave prompted investors to proactively reduce portfolio risk. He noted that funds unsettled by AI-related risks are flowing back into the healthcare sector. However, the rise in healthcare stocks does not rely entirely on safe-haven demand. Michael Arone of State Street Investment Management believes that corporate earnings performance in healthcare and improving market expectations for the industry's 2027 outlook are also supporting the sector's gains. In his view, investors are not selling technology stocks across the board and buying healthcare stocks, but rather rebalancing portfolios to reduce previously excessive concentration in AI-related assets. In addition, the upcoming U.S. midterm elections have also become an important factor affecting fund flows. As investors begin to assess possible changes in Washington's political landscape, demand is rising for sectors that can withstand potential policy shifts. Morgan Stanley analyst Erin Wright noted that the healthcare sector is seen as somewhat insulated from regulatory policy noise and therefore relatively attractive in the current political environment. However, as the U.S. earnings season enters a critical phase, the healthcare sector's continued rally is also facing a test. Earlier this month, Johnson & Johnson's results failed to meet market expectations, dragging the healthcare sector to its worst performance in more than a month. Subsequently, full data from a trial of a personalized melanoma vaccine developed by Moderna (MRNA.US) in partnership with Merck & Co., Inc. (MRK.US) were leaked, dealing a blow to the relatively high expectations previously built up in the market. Moderna shares plunged 18% last Thursday. Affected by the related news, the S&P 500 Healthcare Index fell 1.1% last Friday, retreating from the record closing high set in the previous trading session. With industry leaders such as Eli Lilly about to report earnings, the market will further test whether the healthcare sector's fundamentals can support the recent rally. Orton believes the current period is critical in determining the healthcare sector's next move. He said that if large healthcare companies can deliver results in line with or above expectations, the sector still has room for further gains. The reason is that for some time market funds have been overly concentrated in the AI investment theme, leaving healthcare relatively underallocated. Judging from the latest views of Wall Street institutions, the appeal of the healthcare sector is steadily increasing. Earlier this month, Royal Bank of Canada Capital Markets upgraded the healthcare sector to "overweight" while downgrading the technology sector to "market weight," reflecting a shift in its expectations for the relative performance of the two sectors. Ohsung Kwon, chief equity strategist at Wells Fargo & Company, believes the market's next leadership may no longer come mainly from the semiconductor industry. He noted that semiconductors are currently one of the largest-weighted industries in the S&P 500, and as funds flow out of semiconductor stocks, investors will look for other areas that can benefit. Kwon expects that a considerable portion of funds may still flow into other segments within the technology industry, but the healthcare sector will also become an important destination for capital. Overall, as the AI investment boom faces stricter valuation and earnings scrutiny, the U.S. stock market is showing signs of rotation from highly valued technology stocks into other sectors. With relatively attractive valuations, improving earnings prospects and strong defensive characteristics, the healthcare sector is becoming an important choice for Wall Street to reallocate capital. However, whether healthcare stocks can sustain the strong performance of the past six months will still depend on the upcoming earnings reports of large pharmaceutical companies and on whether market risk appetite for AI-related assets declines further.