Summary

• The healthcare sector posted strong returns in June, driven by M&A activity, improved regulatory prospects, and market rotation. Sentiment for biotech stocks was further strengthened by new leadership at the US drug regulator, the FDA.
• We assess the outlook for all sub-sectors as favorable. However, shifts in the inflation outlook bear monitoring.

Portfolio Manager, Hugo Schmidt

Monthly comment

After two exceptional months in April and May, the broader stock market took a breather in June, closing down half a percent. Energy stocks fell sharply due to developments in Iran, and a number of AI-related companies performed weakly after OpenAI signaled a delay to its IPO. With the benefit of hindsight, some profit-taking in AI-infrastructure companies was not surprising, as they were coming from heavily overbought territory.

All the more encouraging was that healthcare stocks bucked the trend and were clearly the best-performing sector of the month. S&P 500 healthcare stocks had their best relative performance against the S&P 500 index since 2001.

Will 2026 be a record year for M&A?

M&A activity in the healthcare sector continued at a breathtaking pace. According to PitchBook, global biopharma deals in 2026 have so far reached $106 billion across 201 transactions, the strongest pace since the pre-pandemic peak. Both the number of deals and the average deal size have jumped by more than 50 percent since last year.

Positive news from the US drug regulator

Until March, Dr. Vinay Prasad led the FDA’s biologics division, CBER. Among other things, CBER approves vaccines and gene therapies. Prasad became known for a series of restrictive decisions, including blocking Moderna’s application for an mRNA-based flu vaccine (without even letting the FDA review it) and requiring a controversial study from uniQure on their gene therapy for Huntington’s disease. Prasad was forced to leave CBER following internal criticism, and new leadership has since come in. In June, several of his decisions were softened, which was welcomed by the market.

Moderna’s vaccine will now be evaluated by an expert panel, and uniQure has received the green light from the FDA to submit an application (a so-called BLA or Biologics License Application) for its gene therapy. Taken together, this reduces the regulatory uncertainty that has weighed on both mRNA vaccine and gene therapy companies, and is positive for sentiment across the entire biotech sector.

The FDA is still without a permanent commissioner, following Dr. Marty Makary’s resignation in May. During June, speculation about Makary’s replacement intensified.

Despite a somewhat chaotic period at the FDA since the second Trump administration took over in January last year, the number of approvals has not declined. Currently, the number of approvals is on track to exceed the 5-year average of 48 new drug approvals per year. Another healthy sign for the sector.

Reflections

Can the strong momentum seen across all healthcare sub-sectors in June continue?

Financing appetite is healthy. The underlying driver of M&A activity is the so-called patent cliff, meaning a large number of drugs are set to lose patent protection by 2030. Capital markets have also come back to life. During the first half of 2026, the sector raised more capital through IPOs than in all of 2025, and the first quarter was the strongest since 2021. There is plenty of capital still sitting on the sidelines – according to data from Bank of America, global fund managers are underweight the healthcare sector, and the 25 largest pharmaceutical companies have an estimated $1.3 trillion of dry powder on their balance sheets.

Even though the market has welcomed developments in the vaccine and gene therapy space, the FDA’s future direction remains uncertain. We still do not know who will be appointed to lead the agency, or the agenda that will be pursued. Furthermore, rate expectations have risen since newly appointed Fed chair Kevin Warsh held his first press conference in mid-June. However, the underlying momentum in biotech was strong enough in June that the sub-sector’s traditionally inverse correlation with interest rates did not hold. The question is whether this is sustainable over time.

Within healthcare services, we have now seen many stocks regain valuation multiples in line with their historical average. The sub-sector is no longer trading at any significant discount, but earnings remain at depressed levels. We estimate that companies’ normalized earnings power, particularly within health insurance and life sciences tools, is clearly above today’s results.

Medical technology is the sub-sector that has performed the worst so far this year. The Section 232 tariff investigation continues to weigh on sentiment, but we should have an outcome on the matter by the end of August at the latest. Expectations range anywhere from tariffs of 10 to 25 percent based on previous Section 232 decisions (steel, aluminum). We view an outcome toward the lower end of the range as more likely, which would be a positive catalyst for the sub-sector.

Closing thoughts

In November, US voters head to the polls to elect all 435 members of the House of Representatives and one-third of the Senate’s 100 members. Healthcare issues have not dominated the political rhetoric so far, which bodes well for the sector.  Historically, the healthcare sector has outperformed the S&P 500 by an average of 17 percent during midterm election years from 1994 to 2024.

Beyond the election-related backdrop, a sudden deterioration in geopolitical conditions and the AI infrastructure buildout are two tail risks that could put renewed upward pressure on inflation. We view a sharp rise in inflation expectations as relatively unlikely and thus assess the outlook as favorable for the healthcare sector, which hopefully has just begun its comeback on the stock market.