Health Care Strikes Back — Why Our Favourite Sector Is Back
January 19, 2026
10 min read
Health Care Strikes Back — Why Our Favourite Sector Is Back
After five years of disappointment: improving fundamentals, easing policy uncertainty, attractive valuations, and broadening technical strength suggest a durable shift back toward innovation, growth, and defensive quality. Our original analysis for The Market by NZZ — plus the extended investor's view for arvy readers.
The thesis on video — 1 minute
In 30 seconds — the core thesis
- Health care has been one of the biggest underperformers since Covid — five years of mostly disappointment, with one major exception: the breakthrough GLP-1 weight loss drugs from Eli Lilly and Novo Nordisk.
- That is changing now — fundamentally and technically. Better valuations, easing policy pressure, multiple innovation cycles, broader market breadth. Health care is positioning for outperformance again.
- Health care is one of four "good sectors" — alongside technology, industrials, and consumer staples. Structural growth, high returns on invested capital, real pricing power. The kind of businesses you hold for decades, not quarters.
The original analysis — the opening
Five years it took.
Our favourite sector is making a comeback: healthcare.
It is one of the four good industries to own — alongside technology, industrials, and consumer staples. These are the sectors where you find businesses you can hold for decades, not quarters. Businesses shaped by structural growth, delivering high and stable long-term revenue and earnings growth, earning strong returns on invested capital, and exercising genuine pricing power.
Just as important, many of these companies operate behind formidable economic moats. Oligopolies. Duopolies. Occasionally even monopolies. This is the kind of hunting ground we like to roam.
Health care, in particular, enjoyed a rosy moment prior to the boom — and bust — of Covid. But strip that episode away, and the last five years have largely fallen short of expectations. There was little to celebrate, save for one standout story: the breakthrough weight loss drugs from Eli Lilly and Novo Nordisk.
Today, that is changing. The outlook is improving — both fundamentally and technically.
Healthcare is striking back.
→ Read the full article on The Market by NZZ
Chart 1: Health Care relative performance to the S&P 500 over the last 30 years
Source: NZZ The Market
01The uncomfortable question: why now?
When a sector underperforms for five years — the worst five years relative to the market since the mid-1990s, as the chart shows — that is justifiably disappointing. Investors who entered health care in 2020 have lost substantially relative to the S&P 500. The question that doesn't fit into an NZZ column but is central for every investor: why should the turn happen now of all times — and not in two or three years?
The honest answer: nobody can time the exact turning point. What can be objectively observed is the convergence of several structural factors that have historically initiated trend reversals when they appeared in combination:
- Valuation reset complete — after five years of relative weakness, health care trades at substantial valuation discounts to the broad market
- Policy risk de-fanged — the drug pricing debate under Biden has been legislatively channelled into the IRA path; market prices have absorbed it
- Innovation density rarely seen — multiple new modalities (mRNA, cell and gene therapies, ADCs, GLP-1) reach commercial maturity simultaneously
- Demographic load accelerating — the boomer cohort enters the age segment with the highest per-capita healthcare spending
- Technical market breadth widening — not just the obvious winners, but laggards are starting to turn
What does "fundamentally and technically" mean?
Fundamentally: the factors that determine a business long-term — revenue growth, margins, cash returns, competitive position. These are objectively better than 12 months ago. Technically: the behaviour of stock prices themselves — trend strength, market breadth, volume, relative performance. This has clearly turned since mid-2025. When both dimensions turn simultaneously, the probability of a sustainable trend reversal is significantly higher than when only one turns.
02Three structural drivers behind the turn
What the NZZ analysis presents in compact form can be broken down into three separate, mutually reinforcing forces. Each alone would be an argument; all three together are an investment case.
Driver 1 — Demographics as a non-negotiable tailwind
Demographics is the only investment factor that doesn't change overnight — and whose effect is mathematically predictable. The baby boomer cohort (born 1946–1964) is now fully entering the 65+ age segment. The relevant economic fact: per-capita healthcare spending roughly doubles between ages 55 and 75 and multiplies further by 85. In the US, Western Europe, and Japan, the number of people over 65 will grow by 25–40% over the next decade. That is a demand-side tailwind running completely independent of the business cycle. And it's accelerating right now — not slowing down.
Driver 2 — Convergence of multiple innovation cycles
Health care has rarely had so many commercially mature breakthrough technologies simultaneously. GLP-1 agonists demonstrated that one indication class (obesity and its sequelae) can open multi-hundred-billion markets. But that's only the most visible wave. In the background: mRNA platforms beyond Covid (oncology, rare diseases), CAR-T and cell therapies, ADC conjugates in oncology, the next chapter of diabetes treatment, early successes in Alzheimer's. Each technology individually would be a story. Together they produce an innovation density the sector hasn't seen since the 1990s.
Driver 3 — Policy pressure absorbed, regulatory risk de-fanged
A major reason for the underperformance of the last five years was political pressure — particularly the US drug pricing debate, which was channelled by the Inflation Reduction Act into a clear legislative path. The market has priced this in. What were latent boogeymen 24 months ago (Medicare negotiation requirements, inflation caps, international reference prices) are today digested in valuations. That is not the disappearance of risk, but the devaluation of its surprise effect. Exactly this shift — from "unknown political pressure" to "known political pressure" — historically often leads sector turns.
The convergence logic
These three drivers don't act additively but multiplicatively. Demographic demand explosion × unusual innovation density × absorbed policy risk produces a constellation rare in sector history. Which doesn't mean the next 12 months will be a straight line up — only that the multi-year risk-reward asymmetry has structurally shifted.
03What this means for your quality portfolio
Health care is one of the few sectors where quality investing principles are almost textbook applicable. Durable competitive advantages through intellectual property, regulatory entry barriers, scale advantages in R&D, high and stable cash returns — these characteristics are found in many sub-sectors. But: not every healthcare business is the same. It pays to distinguish the sub-categories because their characteristics differ greatly:
| Sub-sector | Quality characteristic | Main risks |
|---|---|---|
| Large-cap pharma | Stable cash generation, high margins, patent protection | Patent cliffs, drug pricing, pipeline risk |
| Med-tech & devices | High switching costs, scale advantages, long product cycles | Innovation disruption, reimbursement |
| Healthcare services | Local scale advantages, regulatory moats | Reform risk, margin pressure |
| Biotech / specialty pharma | High innovation premiums, often monopolistic | Very high binary risk (pipeline) |
| Life sciences tools | "Picks and shovels", asset-light, high recurring revenue | Capex cyclicality at pharma customers |
For most long-term oriented investors, the first two categories (large-cap pharma and med-tech) are the most robust. They combine defensive characteristics (stable demand, high margins, dividend-capable) with structural growth perspective. Biotech and specialty pharma are higher in expectation and volatility — suitable for investors who can handle binary risks, less so for most retail investors.
How arvy is positioned in this market phase — and how our sector allocation has shifted since the start of the year — is documented transparently in the current arvy Strategies Quarterly Report Q1 2026. The quality investing logic behind sector selection is deepened in our pillar article The Tortoise Problem.
04Three scenarios for the next 18 months
Nobody can time the market — not us either. But we can lay out the most plausible paths and honestly assess each one's implications:
Bull Case
Multi-year outperformance, sector partially closes the 5-year gap
The innovation pipeline delivers multiple commercial successes, demographic demand materialises measurably in quarterly figures, regulatory environment stays stable, GLP-1 develops not as an isolated phenomenon but as a precursor to further blockbuster classes. Health care outperforms structurally — comparable to the sector turn 2009–2015. Quality champions within the sector deliver above-average returns, broad sector ETFs benefit alongside.
Base Case
Selective outperformance, sharp differentiation within the sector
The sector closes the gap to the broad market gradually, but performance differentiates strongly between innovation winners and structural losers. Quality selection decides — the right single stocks significantly better than the sector average. Broad sector ETFs deliver moderate excess return, individual champions clearly above. Our base case.
Bear Case
False turn — political shock or innovation disappointment
A political surprise (election outcome, new regulatory wave), a slowdown in GLP-1 adoption, or pipeline disappointments lead to renewed underperformance. In this scenario, the last few months were not a sustainable turning point but a bear market rally. Risk lies primarily with investors who entered the sector late and concentrated.
How disciplined investors navigate sector turns — and why quality typically outperforms broad sector bets across full market cycles — is described in our pillar "Investing in Turbulent Times".
05What you should review now
An honest self-assessment takes 30 minutes and is the most valuable step an investor can take at a presumed sector turn. Four concrete checks:
1. Inventory — where do you stand today? Look at how much of your portfolio is in health care. An MSCI World ETF typically has 11–13% health care, an S&P 500 similar. A classic Swiss bank portfolio with Roche and Novartis can be significantly higher. Those concentrated in tech strategies often have surprisingly little health care. First question: do you know?
2. Concentration check — are you structurally positioned? If the bull or base case materialises, 5–10% health care exposure is a reasonable floor for most retail investors. Those significantly below should consciously acknowledge the gap — either as deliberate underweighting or as reason to build up gradually.
3. Sub-sector understanding — do you know your exposure? Health care is not health care. A pharma ETF behaves completely differently than a biotech fund. Volatilities and risk profiles differ greatly. Anyone building health care exposure should at least roughly know in which sub-sectors that happens.
4. Horizon check — how much time do you have? Health care rewards long-term investors particularly because the structural drivers (demographics, innovation cycles) work over decades. With a 10+ year horizon, you can sit out interim drawdowns and benefit from the trend. With 2–3 year horizon, a political or pipeline disappointment is harder to absorb.
What disciplined investors do now
They don't panic-buy because "the turn might be here". They look at their allocation honestly, check whether they're structurally under-invested, and build up — if so — gradually. A 5–10% allocation in quality healthcare champions is a different statement than a 30% sector tilt after three months of outperformance. History rewards investors who are early and disciplined — not those who jump in after the first wave.
06Frequently asked questions
If healthcare is arvy's favourite sector — how much do you currently hold?
Specific sector and single-stock allocations are communicated transparently every quarter in our quarterly reports. We held health care systematically through the underperformance phase and selectively built up because we considered the structural drivers intact. The concrete figures and shifts since the start of the year are in the Q1 2026 Quarterly Report.
GLP-1 has run a lot already — am I too late?
For the GLP-1 pioneers themselves (Eli Lilly, Novo Nordisk), the easiest phase is probably over — the next phase will be shaped by competition, indication expansion, and new oral formulations. But GLP-1 is only one of several parallel innovation waves. The honest answer: for health care as a sector thesis it's not too late; for the specific GLP-1 first-mover bet probably yes.
What about political risks — drug pricing, new regulation?
Political risks are real and will never disappear. What has changed: the regulations introduced under Biden are absorbed in valuations, the sector no longer trades under constant boogeyman valuation. A new political surprise can come at any time — but that applies to every sector. Health care has the advantage that most political risks have multi-year lead times (legislation, regulatory paths), giving disciplined investors time to adapt.
How much health care makes sense — generically?
We don't give blanket allocation recommendations because they're worthless without knowledge of individual situation. But as orientation: a broadly diversified quality portfolio with a long-term horizon typically has 10–20% health care, with focus on large-cap pharma and med-tech. More is a deliberate overweight, less a conscious underweight. Both can be right — the key question is whether it's conscious.
Further reading — the thematic anchors of this analysis
The Tortoise Problem
Why quality investing in healthcare works textbook-style
arvy Quarterly Report Q1 2026
Current sector allocation transparently documented
The Return of the Old Economy
Another sector rotation, same logic
Investing with arvy: The Complete Guide
How this analysis fits the overall strategy
Investing in Turbulent Times
Quality across full market cycles
Why arvy
The full strategy and positioning explanation
Our favourite sector — and why patience matters
Health care is not the most exciting sector to pitch. Most stories take years. Research takes time. Approvals take time. Market introduction takes time. But exactly these characteristics — the fact that nothing is fast — are also the source of the competitive advantages that make healthcare champions so robust. Bringing a new substance from patent to market readiness takes a decade and billions. These entry barriers cannot be digitised, cannot be disrupted in the classical sense, cannot be overcome overnight.
Exactly that is why health care is our favourite sector. It is the sector where patience is rewarded most visibly — over decades, not quarters. The underperformance of the last five years was unusual, but it was not the end of the story. It was an episode. And the turn we are now seeing is consistent with all historical patterns in which quality sectors reorganise after extended periods of weakness.
Original written by Thierry Borgeat, Co-Founder of arvy, for The Market by NZZ. The extended arvy companion piece reviewed by Patrick Rissi, CFA and Florian Jauch, CFA. Data sources: NZZ The Market, own analyses. Last updated: April 2026.
Disclaimer: This article is for general educational purposes and does not constitute personal investment advice. The sector and security designations mentioned are illustrative and not buy or sell recommendations. Past performance is no guarantee of future results. Scenarios are assessments, not forecasts. arvy is a FINMA-supervised asset manager with a CISA licence (Art. 24). Imprint & Legal Notice.
