After underperforming through the first three quarters of 2025, the healthcare sector has staged an impressive rebound in Q4.
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In an investment environment dominated by large-cap technology firms and hyperscalers, it is easy for smaller, traditionally defensive sectors to receive less attention. After underperforming through the first three quarters of 2025, the healthcare sector has staged an impressive rebound in Q4. Since the end of September, the Health Care Select Sector SPDR Fund (XLV) has gained 9.75% as of Thursday. Even more notably, XLV is outperforming the second-best sector by over 8% and the S&P 500 Index (SPX) by nearly 9%, as shown in the chart below.
This strong performance can be attributed to several factors: investor rotation into a long-lagging sector, a shift in sentiment from “risk-on” toward more defensive positioning, and increased corporate and M&A activity. If these dynamics persist, healthcare could maintain its momentum. This past week brought two significant developments: (1) The Health Care group on the Asset Class Group Scores page crossed above 4.0 for the first time since February 2021; (2) XLV itself surpassed a fund score of 4.0 for the first time since October 2024.
For the first milestone, we analyzed every instance since 2003 where the healthcare group exceeded 4.0 (excluding short-term clusters) and calculated XLV’s forward returns across multiple intervals. To reduce skew, we also included averages excluding 2008 crisis data. The results show above-average returns for 1-week, 1-month, 3-month, and 6-month horizons, while 1-year returns trend closer to historical norms.
For the second milestone, we applied the same methodology to XLV crossing above 4.0. Again, short-term forward returns were notably strong, with performance moderating toward average levels over a one-year horizon. These findings suggest that while near-term momentum is favorable, longer-term returns may normalize as the sector stabilizes.
Bottom line: Healthcare’s recent strength, coupled with improving technical signals, highlights a growing opportunity for investors. For active managers, this sector merits close attention—not only for its current momentum but also for its defensive qualities in an uncertain market environment. As you identify potential entry points, remain mindful of possible overbought conditions, as indicated by the “Weekly OBOS” signal. Consistent monitoring will be key; doing so can help uncover attractive opportunities as the trend evolves, allowing you to capture more of the sector’s upside while managing risk effectively.
