Healthcare Rotation Underway: 3 Stocks Leading the Charge

Is the artificial intelligence revolution hitting its first roadblock? For the first time since the AI boom began in 2023, the industry is starting to feel the weight of expectations, and many of the tech sector’s biggest winners have been struggling amidst a volatile market. Have you checked on Meta Platforms Inc. (NASDAQ: META) lately? Down more than 20% in the last three months, and now only up 2% on the year. How about NVIDIA Corp. (NASDAQ: NVDA), the semiconductor stalwart? It’s still up more than 35% year-to-date (YTD), but only 3% of that advance has come since July. And looking at the Tesla Inc. (NASDAQ: TSLA) chart is enough to have a risk-averse investor reaching for the Dramamine. 

Where have all the gains gone? Speculative assets and meme stocks had their day in the sun this summer, but the recent rotation has been to healthcare, a sector most investors left behind while chasing hot tech trends. Is this rotation a brief venture into safer water, or does it have momentum? 

Why Healthcare Is Surging Now

Despite several breakthroughs, the healthcare sector has lagged the broader market for the last five years. Not only have healthcare stocks underperformed the S&P 500, but the AI-infused tech industry has blown them away.

A 34% gain over that period isn’t poor, but it lags far behind the explosive rise of AI and tech stocks. However, several key factors are now pushing healthcare back into focus:

• Pharma Catalysts: Perhaps you’ve heard of GLP-1s? While these drugs aren’t new, the success they’ve had treating diabetes and obesity has revolutionized weight loss programs, creating a massive revenue source. The Trump administration recently reached a deal with several GLP-1 developers to provide access to Medicare and Medicaid patients at reduced prices.
• Attractive Valuations and Strong Earnings: Healthcare has become undervalued, especially compared to the nosebleed valuations tech companies have received. Healthcare trades at just 16 times forward earnings, while tech is well over 30 times forward earnings. The sector also demonstrated defensive strength during the Q1 2025 bear market, further reinforcing its appeal.
• Sector Rotation: The AI sector appears ripe for profit-taking, with a majority of tech stocks now trading below their 20-day moving averages. In contrast, healthcare is seeing inflows not observed since early 2021. As investors seek stability, healthcare's reputation as a defensive play could fuel a longer-term rally.

3 Healthcare Stocks Leading the Sector Higher

The rotation to healthcare is still in the early innings, which likely means there are still profits to be made with the cream-of-the-crop stocks in the sector. Here are three large-cap healthcare companies leading the sector higher.

Eli Lilly and Company: GLP-1 Dominance Driving Shares Higher

It was looking like a lost year for Eli Lilly and Co. (NYSE: LLY) until the recent rally. The stock dipped below $630 in August for the first time since January 2024, despite the success of its GLP-1s—Mounjaro for diabetes and Zepbound for obesity. Lilly also has an oral GLP-1 tablet currently in Phase 3 clinical trials that, if approved, would be easier to scale compared to injectables like Mounjaro and Zepbound.

The recent breakout in LLY shares was spurred by two fundamental catalysts: excellent Q3 earnings that beat both top- and bottom-lines, and a federal deal improving Medicare access to its drugs. With technical tailwinds now supporting the breakout, LLY is reasserting its leadership in the healthcare rally.

Merck: Undervaluation Reaching Record Levels

Merck and Co. (NYSE: MRK) has been one of the most disappointing large-cap stocks in the sector, down nearly 7% YTD and more than 20% from its previous all-time high in July 2024. Merck is no stranger to prolonged downturns (the stock didn’t reclaim its 2000 all-time high until late 2019), but the company has a diverse pipeline and a stock that's tremendously undervalued at just 10 times forward earnings.

Merck reported 8% year-over-year (YOY) sales growth in its lead oncology drug Keytruda, and total Q3 revenue exceeded $17 billion for the first time in the company’s history. With a low valuation, a strong dividend, and several revenue drivers such as Keytruda and Gardasil, MRK shares could be an enticing buy for the first time in several years.

AbbVie: Diverse and Innovative Drug Portfolio

If you’ve gotten the TV jingle for SKYRIZI stuck in your head lately, you have AbbVie Inc. (NYSE: ABBV) to thank. The $400 billion pharmaceutical giant is also the developer behind HUMIRA, RINVOQ, VRAYLAR, and added BOTOX to its portfolio in a 2020 acquisition. ABBV has been one of the best-performing stocks in the healthcare sector, up more than 30% YTD, and its sales of SKYRIZI and RINVOQ have driven back-to-back quarters of record revenue.

In Q3 2025 earnings released on Oct. 31, AbbVie reported SKYRIZI sales of $4.7 billion (up 46% YOY) and RINVOQ sales of $2.2 billion (up 34% YOY), and raised its 2026 outlook for both drugs. Despite adding these two new revenue drivers to its flagship HUMIRA, the stock still trades at just 19 times forward earnings, below both its historical average and the current sector average. With strong product momentum and a reasonable valuation, AbbVie is well-positioned to sustain leadership as the healthcare rally continues.

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