Lilly's Moment: AI-Powered Pipeline Positions Shares to Surge in 2026

We have now entered the fourth year of the bull market that began off the October 2022 lows. Since that time, we’ve experienced a dramatic run-up in technology companies, buoyed by the artificial intelligence theme.

The lifeblood of a bull market is rotation, or the passing of the baton from one group to the next. With every year comes a different market theme. It’s our job to identify that theme and position our portfolios to benefit from it. At the end of 2025, the market action has witnessed a notable rotation in sector strength.

As we make our way into 2026, the next major move is already in motion: a decisive rotation into health care, with large-cap pharmaceuticals poised to seize the crown as the market’s most compelling leadership group.

Our team here at Zacks projects health care to emerge as a leading performer, fueled by resilient demand, technological innovation, and favorable policy tailwinds. And our proprietary Zacks Rank systems have begun to confirm this developing trend.

Stay Abreast of Sector Rotation in 2026

The financial markets are a dynamic place, and we know that markets lead the economic cycle. Evidence continues to mount suggesting a rotation into other sectors.

As the end of the year draws near, we’ve witnessed a subtle shift into health care. We can see below that over the past month, this sector is outperforming the other S&P 500 sectors by a wide margin.

Health care companies bring the best of both worlds. They’re historically viewed as a defensive area of the market that is relatively immune to economic volatility, as patients require care regardless of the state of the economy. Yet irrespective of the defensive theme, high levels of innovation are taking place in health care.

The emergence of AI in health care has been revolutionary, reshaping the way we diagnose, treat and monitor patients. More personalized treatments along with more accurate diagnoses are just a few of the ways AI has benefitted this space. From scanning images for early disease detection, to predicting patient outcomes via machine learning, the potential applications of AI and health care are extensive.

The health care sector's projected leadership in 2026 is underpinned by structural tailwinds that transcend cyclical recovery. Geopolitically, U.S. tariffs—imposed via Section 232 investigations—threaten supply chains, but exemptions for pharmaceuticals mitigate risks, insulating the sector from broader trade wars.

When we combine the traditionally defensive nature of health care with the potential for substantial price appreciation due to explosive growth prospects, we have a recipe for success.

Pay Attention to the Company a Stock Keeps

Top industry groups are dynamic and change over time as sector rotation occurs. By focusing on stocks within the top Zacks Ranked Industries (which harnesses the power of the Zacks Rank), we can provide a constant tailwind to our investing success.

Within the broader health care sector, the Zacks Large Cap Pharmaceuticals industry is showing relative strength and is currently ranked in the top 37% out of approximately 250 industry groups. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months, just as it has over the past few months:

Historical research studies suggest that approximately half of a stock’s future price appreciation is due to its sector and industry group combination. By targeting stocks contained within the top industry groups, we can dramatically improve our odds of success. Note the favorable metrics for this group below:

Large-cap pharmaceutical companies, with market caps exceeding $200 billion, are the linchpin of health care's 2026 outperformance, leveraging AI to slash R&D timelines and costs.

Large-Cap Pharma Leader Hits All-Time High

One stock in particular from the large-cap pharma space stands out and has surged into year-end while the major indexes take a breather. Key deals underscore this momentum.

Eli Lilly LLY discovers, develops, and markets human pharmaceuticals worldwide. The company’s array of products serves a vast number of therapeutic areas including diabetes, neuroscience, oncology and immunology, all of which are high growth areas that represent significant commercial potential.

Eli Lilly boasts a dependable pipeline and is one of the world’s largest pharmaceutical companies. Shares are breaking out after the company recently announced a drug pricing deal with the Trump administration.

Starting next year, Medicare will begin covering Lilly’s leading weight loss drug, Zepbound, at a 55% discount from current net prices. While this seems like a rather large concession, the deal opens up a vast new market for the company via a meaningful rise from Medicare and Medicaid sales.

But most importantly, as part of the deal, Eli Lilly avoided mandatory price cuts for private insurers, successfully shielding itself and protecting its most lucrative revenue channel. In addition, the pharmaceutical giant received a 3-year tariff exemption, which is certainly a bullish catalyst moving forward.

In addition, Eli Lilly's October 2025 partnership with NVIDIA builds an "AI Factory" using Blackwell DGX SuperPOD for real-time drug discovery, targeting obesity and cardiometabolic therapies. This follows Lilly's $1.3 billion alliance with Superluminal Medicines, integrating AI for next-gen candidates.

Another positive development is Lilly’s recent $100 million-plus deal with Insilico Medicine, with hopes of using its Pharma.AI platform to discover new drugs and advance novel therapies. Lilly’s stock touched an all-time high following these recent announcements.

Analysts bumped up their earnings estimates for next year by 9.28% in the past 60 days. The 2026 Zacks Consensus EPS estimate now stands at $33.68 per share, reflecting a staggering 40.9% growth rate relative to this year. Revenues are anticipated to surge 23.3% to $78.84 billion. These are phenomenal growth rates for a company of this size.

Bottom Line

With health care outperforming lately, it makes sense to steer our portfolios into the sector, which boasts a promising combination of both defensive and growth characteristics.

Eli Lilly is experiencing positive earnings estimate revisions and looks set to grow its top and bottom lines at a healthy clip in 2026. The industry as a whole is undervalued and appears primed to continue its recent trend of outperformance.

As 2026 unfolds, sector rotation should spotlight health care's enduring strength, with large-cap pharma at the vanguard. AI deals will streamline innovation, tariff exemptions will safeguard profitability, and demographic imperatives ensure demand. This positions the sector—and its blue-chip leaders—for robust returns in an unpredictable market.

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This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research