State Street Upgrades U.S. Healthcare on Drug Pipeline

State Street Investment Management upgraded its U.S. healthcare sector outlook from neutral to positive in its Q3 2026 sector report, citing a stronger drug pipeline and unusually low valuations.

The report identified several scientific developments that could support higher drug revenues over the next one to two years. Next-generation obesity treatments produced notable weight loss and improvements in cardiovascular risk markers. Research aimed at improving drug delivery to the brain showed progress in Alzheimer’s drug development. Early gene-editing data indicated sustained reductions in cholesterol. Presentations at the American Society of Clinical Oncology’s 2026 meeting included advances in early-stage breast cancer, non-small cell lung cancer and pancreatic cancer.

State Street also pointed to a valuation case for buyers. The sector’s forward earnings multiple relative to the broader market sits in the lowest 20% of readings over the past 15 years, and overall healthcare valuation is at its cheapest level in about 15 years. The report noted that long-running headwinds such as drug-pricing uncertainty and slower procedure growth appear at least partly reflected in current prices.

Earnings expectations in the report show modest growth in the near term and a larger rebound in 2027. Projected sector earnings growth is about 2.6% for 2026 and 19.3% for 2027, a pace second only to technology. The firm said managed care and provider dynamics are stabilizing: physician visits and procedure volumes have normalized, easing some pressure on insurer margins but not returning to prior rapid growth rates.

The report flagged ongoing risks. Policy uncertainty over drug pricing and how managed care reimburses providers could affect profit margins. Demand for medical technology remains soft as procedure volumes normalize, which could pressure device makers and suppliers.

State Street suggested ways investors can gain exposure. The State Street Health Care Select Sector SPDR ETF (XLV) provides broad sector exposure; institutional flows into the fund category were near a five-year high over the past month, rising from a low base, and many institutional portfolios remain underweight healthcare. For income-focused investors, the State Street Health Care Select Sector SPDR Premium Income ETF (XLVI) holds XLV shares and generates income by selling call options; XLVI’s fact sheet lists exposure to pharmaceuticals, health care equipment and supplies, biotechnology, providers, and life sciences tools and services, and the fund carries a gross expense ratio of 0.35%.