Where Evidence Meets Opportunity | April 2026

Healthcare Investing in a More Discerning Market Environment

Written by: David Mandelbaum, Portfolio Manager

Key Takeaways This Month

• The Healthcare Sector has found itself on the wrong side of a powerful momentum regime dominated by the AI capex complex.
• That momentum has been propelled by much better-than-expected Q1 earnings from a narrow group of AI-related beneficiaries, even as questions remain around the composition, pull-forward, and sustainability of that growth.
• Healthcare’s underperformance has pushed relative valuations to historically depressed levels that appear increasingly disconnected from the sector’s underlying fundamentals.
• The current setup is reminiscent of last year, when first-half underperformance driven by policy fear, technical pressure, and narrow market leadership was followed by a strong back-half recovery as perceived risks moderated and fundamentals reasserted.
• In periods such as this, we believe the best approach is to concentrate exposure in the highest-quality, highest-conviction companies, reduce or exit holdings where the thesis has weakened, and preserve flexibility for a broader rotation back toward durable earnings growth at depressed valuations.

We are clear-eyed about the sector’s extended underperformance, but we remain confident that durable fundamentals, depressed valuations, and improving subsector evidence are creating a considerably more favorable setup as the year progresses.

Market Update: Stronger Earnings, But Narrow Leadership

In the several weeks since our last commentary, markets have witnessed one of the more remarkable repricings in recent memory. When Iran-related tensions escalated in late March, the working assumption across much of the investment community was that an oil shock layered on top of an already fragile growth backdrop would derail what had been a tentative recovery from the early-year correction. Instead, the S&P 500 has rallied sharply off its March low, the Nasdaq 100 has surged to a fresh all-time high, and renewed risk-on momentum has led investors to increasingly look through geopolitical risk, tariff uncertainty, and concerns around the durability of AI-related capital spending.

The proximate driver has been an earnings season few anticipated. With nearly 90% of S&P 500 companies now having reported, FactSet estimated that 84% had beaten EPS expectations, with aggregate earnings surprises running more than 18% above estimates. The blended Q1 earnings growth rate has risen to roughly 28%, more than double the growth rate expected at the end of March. Revenue results have also been better than expected, with roughly 80% of companies beating revenue estimates and blended revenue growth tracking in the low-double digits. On the surface, those are powerful numbers and go a long way toward explaining why the market has been able to look through the concerns that dominated investor attention entering earnings.

But the headline strength may overstate the breadth and durability of the earnings upside. The market’s upgrade cycle remains heavily dependent on a narrow AI infrastructure cohort. Data from Goldman Sachs show that AI infrastructure stocks have seen 2026 EPS estimates revised up roughly 55% year-to-date, while the S&P 500 excluding AI infrastructure has seen 2026 estimates revised down approximately 1%.

The composition of the earnings beats also deserves scrutiny. Per Goldman, a meaningful share of the hyperscaler earnings surge was non-operating, with Alphabet and Amazon generating $53 billion of “other income” in Q1, roughly $49 billion of which was attributable to equity stakes in private companies. That represented nearly 60% of those two companies’ income and 34% of total net income across the five largest AI hyperscalers, the largest such contribution in at least a decade. Meanwhile, parts of the AI infrastructure supply chain may also be benefiting from scarcity-driven pull-forward, as customers order ahead of need to secure capacity in constrained markets.

The market reaction reinforces the same point. This has not been a forgiving broad-based earnings tape. Positive surprises have been rewarded only modestly, while misses have been punished severely. That is usually not the behavior of a market calmly re-rating all earnings durability higher; it is the behavior of a market with a very specific preference set. Investors are rewarding AI-linked growth, select momentum winners, and companies with clean upward revisions, while continuing to penalize laggards, defensives, policy-sensitive sectors, and companies with even modest uncertainty.

For us, the conclusion is that the earnings backdrop is better than feared, but the market’s interpretation of that backdrop remains narrow and fragile. Stronger earnings reduce recession risk and help explain the move to new highs. They do not eliminate the risk that the index is being pulled higher by a concentrated AI capex cycle whose growth may include both durable secular demand and some degree of pull-forward. That distinction is essential for understanding why the S&P 500 can be at all-time highs while Healthcare remains deeply out of favor. 

Healthcare Healthcare: Underperformance, Valuation Compression, and the Search for a Catalyst

Healthcare has been on the wrong side of the current regime. The sector has not underperformed because fundamentals have collapsed across the board. Rather, Healthcare has suffered from a combination of residual policy uncertainty, negative revisions in selected subsectors, AI-disruption concerns, de-grossing, and a market structure that has aggressively rewarded anything linked to AI momentum while penalizing almost everything else.

Yet this has not been a function of a sector-wide earnings collapse. Indeed, per FactSet, in Q1 Healthcare has had one of the highest EPS beat rates in the S&P 500, with 91% of reported companies beating earnings estimates, behind only Tech at 94%. Revenue trends have also improved: Healthcare’s blended revenue growth rate for Q1 has increased to 7.0% from 5.9% at quarter-end, with positive revenue surprises from Lilly, UnitedHealth, CVS, and Elevance among the largest contributors to the sector’s improvement.

While Healthcare is the only S&P 500 sector reporting a year-over-year earnings decline, that headline figure materially overstates the deterioration in underlying earnings power. A large portion of the decline reflects acquired IPR&D expense in Biopharma, including Merck’s planned $9.2 billion charge related to its Cidara acquisition. Excluding that charge, FactSet data indicate that Healthcare would be expected to report 4.1% earnings growth, rather than an earnings decline. Similar charges at peers further depressed the sector’s reported earnings growth number.

This is not to dispute that these charges are real accounting expenses. However, they are not the same as weakening demand, pricing, or franchise profitability. In many cases, they represent capital deployment into future pipeline growth. The problem, therefore, has been less about reported earnings in isolation and more about headline margin optics, policy uncertainty, multiple compression, and the market’s unwillingness to reward non-AI earnings durability.

The valuation setup is the part of the story that matters most for forward returns. FactSet shows the S&P 500 trading at 21.0x forward earnings, above both its 5-year and 10-year averages, while Healthcare trades at a substantial relative discount. More importantly, Goldman’s relative valuation work shows Healthcare’s P/E versus the S&P 500 in only the 24th percentile versus its 10-year history and the 11th percentile versus its 30-year history, among the most depressed readings in Goldman’s sector valuation matrix.

A Familiar Setup, But No Single Obvious Catalyst

The current setup increasingly resembles last year’s pattern. In the first half of 2025, Healthcare materially underperformed as perceived policy risks, including Pharma Tariffs / MFN proposals, NIH funding cuts, FDA staffing uncertainty, and government program reimbursement pressures, overwhelmed otherwise supportive fundamentals. The recovery later in the year was driven less by a sudden improvement in the demand outlook than by a reduction in perceived policy risk, which allowed fundamentals to reassert themselves.

This year’s setup is arguably more extreme: the relative drawdown is deeper, valuation support is stronger, and the sector has become a broader source of funds for the market’s AI and other momentum winners. What is less clear is the catalyst. We do not yet see a clean equivalent to last year’s Pfizer / MFN policy-clearing event. More likely, the path will be sequential: further clarity on pharma pricing and tariffs, stabilization in Managed Care margins, evidence of a Life Science Tools demand bottom, continued proof that the best Biopharma and MedTech franchises can grow through the current environment, and a broadening of market leadership as the current momentum trade normalizes.

Subsector Developments

Managed Care

Managed Care has shown the most visible improvement in recent weeks. Near-term Medicare Advantage policy risk cleared meaningfully after the final rate notice came in better than feared, and the quarter broadly suggested that medical cost trends and margins are stabilizing. The market’s response has been sharp because the group had been priced for continued margin deterioration and reimbursement pressure.

With worst-case policy and margin scenarios fading, we prefer exposure to the highest-quality, most diversified operators. We remain more selective around Medicaid-heavy or Medicare Advantage recovery stories where the beta may be appealing, but the thesis quality is lower and downside risks remain commensurately higher.

Biopharma

Biopharma remains fundamentally healthier than the tape implies, though dispersion remains significant. We see the most compelling opportunities among companies with durable growth franchises, strong product cycles, leadership in large markets such as GLP-1s and oncology, credible pipeline optionality, and the capital-deployment flexibility to offset patent exposures. In contrast, companies with outsized patent-cliff pressure, weaker product cycles, binary data risk, or limited M&A flexibility remain less attractive, even where headline multiples appear inexpensive.

The key point is that Biopharma is not a monolithic group. Innovation still has value, strong franchises are still compounding, and large companies continue to deploy capital aggressively to address future growth gaps. But selectivity remains essential.

Life Science Tools

Life Science Tools, the picks and shovels of scientific R&D, produced some encouraging green shoots this quarter. The most constructive evidence came from bioprocessing, where order trends suggest that the long destocking cycle may finally be bottoming. Select analytical and consumables franchises have also performed better than the broad “Tools are broken” narrative would imply.

That said, the turn remains uneven. Pharma and bioproduction demand appear healthier than academic, government, and funding-sensitive end markets. China remains mixed, and instrument demand has not uniformly recovered. This argues for a concentrated approach: own the highest-quality platforms and differentiated exposures where the data increasingly support a path toward renewed growth acceleration, rather than assume the entire Tools complex has already turned.

MedTech

MedTech remains the most frustrating Healthcare subsector because stock performance has been far worse than fundamentals. Procedure volumes remain generally healthy, innovation cycles are intact for the best companies, and several leading franchises continue to offer visible growth. But in the current tape, “in-line” has not been enough. The group has served as a disproportionate source of funds as investors rotate into AI, Energy, Managed Care, and other higher-momentum areas.

The result has been a vicious negative momentum trade. Modestly mixed quarters have been punished severely, and companies with any hint of guide risk, utilization uncertainty, or competitive concern have seen outsized drawdowns. Valuation has reset meaningfully, but valuation alone is not enough. The lesson from the quarter is that broad MedTech exposure is not the answer. We have concentrated exposure in a small number of the highest-quality, most visible growth companies in the space — companies with durable procedure growth, strong competitive positioning, and innovation cycles that can matter even if the broader group remains under pressure.

Positioning Implications

The quarter did not produce a single, obvious all-clear catalyst for Healthcare. Combined with the current narrow, momentum-driven regime, that helps explain why the sector has continued to lag. But the quarter did produce enough evidence to support a more constructive second-half setup.

Managed Care policy and margin risk have improved. Biopharma remains fundamentally healthy and continues to aggressively deploy capital to support future growth. Life Science Tools are showing early signs of recovery. MedTech remains technically impaired, but the best franchises are not fundamentally broken.

Those conditions have shaped our positioning. We have not bought Healthcare simply because it is cheap. We have upgraded quality, reduced exposure where the thesis has become less compelling, and concentrated capital in companies where fundamentals, valuation, and catalyst visibility justify ownership. We have also preserved flexibility since the catalyst for a broader Healthcare recovery may come gradually rather than all at once.

We are not complacent about the sector’s extended and material underperformance, and we fully recognize that the market continues to ignore Healthcare’s positive fundamentals as selling begets selling and AI exposure remains the path of least resistance. But we have seen these cycles before. In our view, recent price action does not reflect a permanent impairment of the sector or of the companies we own. On the contrary, depressed relative valuations, reduced policy risk, improving subsector evidence, and concentrated exposure to the highest-quality durable growth companies give us conviction that performance can improve meaningfully as the year progresses.

In short, Healthcare has been treated like a broken sector, but the fundamentals increasingly suggest a sector waiting for the market’s attention to return.

If you’d like to discuss how a more selective, evidence-driven approach may fit within your broader portfolio, we invite a confidential conversation with our investment team.

Disclaimers

David Mandelbaum is solely an investment advisor representative and a lead portfolio manager of OnePoint BFG Wealth Partners, a registered investment adviser. Investment advisory and financial planning services offered through Bleakley Financial Group LLC, an SEC registered investment adviser, doing business as OnePoint BFG Wealth Partners. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.

Nothing in this material should be construed as investment advice offered by OnePoint BFG Wealth Partners or David Mandelbaum. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. No chart, graph, or other figure provided should be used to determine which securities to buy, sell, or hold. No representation is made concerning the appropriateness of any particular investment, security, portfolio of securities, transaction or investment strategy. You should speak with your own financial professional before making any investment decisions.

Past performance is not indicative of future results. Neither OnePoint BFG Wealth Partners nor David Mandelbaum guarantees any specific outcome or profit. These disclosures cannot and do not list every conceivable factor that may affect the results of any investment or investment strategy. Risks will arise, and an investor must be willing and able to accept those risks, including the loss of principal.

Certain statements contained herein are statements of future expectations and other forward-looking statements that are based on opinions and assumptions that involve known and unknown risks and uncertainties that would cause actual results, performance or events to differ materially from those expressed or implied in such statements.

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