Healthcare's Record 35.6-Point Edge Over Tech Faces Three Shrinking Risks

Healthcare stocks have beaten technology shares by 35.6 percentage points in the past half-year. That marks the sector's largest lead in a quarter-century, built as investors rotated away from artificial intelligence names.

The Kobeissi Letter reports healthcare gained 31.7% during that span while technology fell 3.9%. That flips the picture from early June, when tech led healthcare by 45.6 points.

How AI Doubts Pushed Money Into Drugmakers

The rotation began late in the spring as faith in the AI trade weakened. From the end of April through October 26, the S&P 500 Healthcare Index climbed roughly 23%, according to Bloomberg.

That outperformed every other sector, with Eli Lilly, AbbVie and Johnson & Johnson driving the advance. Goldman Sachs also pointed AI-wary investors toward healthcare in October.

The gap widened through October. Morningstar's US technology index fell 6.62% that month, while its healthcare index rose 8.82%.

Selling in AI stocks then deepened in November. On November 5, the Nasdaq dropped 5.52% on concerns about a data-center slowdown.

Healthcare insurers and hospital operators had rallied after Democrats took control of Congress.

Only the Dot-Com Bust Saw Healthcare Lead by More

Those moves left healthcare with a lead rarely seen in this century. The Kobeissi Letter identified only one period with a bigger gap.

That was after the dot-com bubble burst, when healthcare's lead peaked at 48.5 points. During the 2008 financial crisis, its lead topped out at 22.9 points. It reached 21.2 points in the 2022 bear market.

The dot-com era also shows how far tech stocks can drop. From March 2000 to September 2002, US tech and communication stocks lost nearly 80%, MSCI research shows. The rest of the market fell 22%.

However, MSCI notes that today's tech leaders are profitable and carry strong margins, unlike many dot-com companies.

What Could Narrow Healthcare's Lead

The record gap does not determine where healthcare moves next. Morningstar now ranks healthcare as the third most overvalued US sector after its rally.

Earnings also remain a test. Johnson & Johnson's October results disappointed and gave the sector its weakest stretch in over a month, Bloomberg reported.

Tech has also shown it can recover. The sector gained 2.5% on November 9 as every S&P 500 sector rose.

The split matters most for holders of cap-weighted index funds, where tech carries the largest weight. In October, the standard S&P 500 fell 0.9% while its equal-weight version gained 5%.

If healthcare holds its lead, that drag on tech-heavy funds could continue.