The S&P 500 has spent much of this bull market rewarding investors who embraced technology, large-cap stocks, and growth investing. That makes a turn toward healthcare seem, at first glance, like a retreat into safety. Sam Stovall, chief investment strategist at CFRA Research, sees a different case: Healthcare may offer investors both a defensive cushion and faster projected earnings growth than the broader S&P 500 in 2027. Stovall sat down with TheStreet’s Caroline Woods to make his case for the industry. In an expensive market, the distinction between a defensive play and chasing growing earnings is an important one. Stovall says the current bull market is the most expensive among bull markets that reached a fourth anniversary since World War II. Yet he also notes that the S&P 500’s forward P/E ratio, a stock-price measure relative to expected earnings over the coming 12 months, fell to below 20 from 23.3 at the start of 2026 as earnings grew faster than anticipated. In his view, that earnings improvement gives investors reason to stay invested, while becoming more selective about where they add money. For Stovall, healthcare fits that more selective approach. He favors it over consumer staples, sees continued opportunity in technology and energy, and argues that the broader market’s direction will depend more on earnings than on whether market leadership becomes perfectly broad. Here is how his healthcare case fits into a cautious but still constructive outlook for stocks. Note: The market musings expressed herein are those of the interviewed guest and should not be treated as professional investment advice. Readers should consult a certified financial planner (CFP) for individualized advice based on their available capital, goals, risk tolerance, and time horizon. Why healthcare can offer both growth and defense in 2027 The core of Stovall’s call is earnings. CFRA Research’s 2027 estimates put healthcare earnings growth at about 22%, compared with 16.8% for the S&P 500 at large. Forecasts are not guarantees, though, and projected earnings can change as companies report results. Still, the comparison explains why Stovall sees a more compelling setup in healthcare than in a sector chosen solely to protect against market volatility. Healthcare is commonly treated as a defensive sector because demand for many medical products and services is considered less sensitive to economic changes than demand for cyclical goods. Stovall’s argument does not rest on defensiveness alone, though. He says projected earnings improvement, recent price momentum, and the sector’s historical performance in U.S. midterm election years all support CFRA Research’s bull case on the sector for the coming year. Here’s a group that in a sense has some growth opportunities ahead, but is also known as being a defensive sector. So it might look good under either scenario. Sam Stovall, when asked why he would choose healthcare as his one opportunity for the rest of the year and into 2027 Stovall’s point is counter to the usual split investors make between growth sectors and defensive sectors. Technology is often bought for growth, while healthcare is often bought when investors want shelter. His thesis is that healthcare could appeal in either environment: It could benefit if earnings expectations stay firm, and it could be relatively resilient if worries about rates, debt, or economic growth intensify. Stovall said CFRA Research had upgraded some individual stocks, naming Cardinal Health as one example it favored for growth potential and defensive characteristics. Investors considering any sector should still examine a company’s earnings outlook, valuation, balance sheet, competitive position, and the role the stock would play in their portfolios. Why consumer staples are a different kind of defensive trade Healthcare’s appeal becomes clearer when compared with consumer staples. Staples, which include companies tied to everyday household goods and food, had climbed nearly 9% in October when Stovall spoke. Healthcare and utilities were each up almost 7%. That kind of leadership can signal that investors are looking for safety, particularly after a sudden scare in a more speculative corner of the market. Stovall said investors were spooked by news about Coreweave’s debt, contributing to a rapid shift out of AI and into bonds and defensive sectors. The 10-year yield fell by 14 basis points in a single day, according to his account. (A basis point is one-hundredth of one percentage point, so 14 basis points equals 0.14 percentage points.) But Stovall does not treat consumer staples as equivalent to healthcare. He said tariffs, fertilizer costs, and the potential effect of GLP-1 drugs on food groups were among the pressures facing staples companies. He also said some companies were reducing volume in an effort to improve profit margins. That makes staples, in his view, more of a safety trade than a source of strong earnings growth. I think it’s primarily a safety trade at this point and not one that will be offering a lot of good earnings growth. Sam Stovall, when asked whether he likes consumer staples after the sector’s year-to-date strength Stovall’s distinction gives investors a practical way to think about defensive rotation, a shift from economically sensitive investments to sectors viewed as steadier. A move into staples can reflect caution. A move into healthcare may also reflect caution, but Stovall believes healthcare has an additional earnings argument. Investors who already hold defensive stocks may want to ask whether they are paying for stability alone or for stability paired with an earnings outlook they find credible. Why Stovall still favors technology alongside healthcare Healthcare is Stovall’s top single opportunity, but it is not a call to abandon the artificial intelligence trade or technology stocks more broadly. He notes that technology accounts for 40% of the S&P 500, and that the share rises above 50% when technology-oriented companies in communication services and consumer discretionary are included. That concentration helps explain why technology earnings and valuations remain central to the market’s outlook. His valuation case for technology is relative rather than simplistic. Stovall said technology was trading at a discount to its own earnings history over the prior five and 10 years, and at a discount to the S&P 500 relative to its history over five, 10, and 20 years. He also said CFRA Research expected technology earnings to rise by more than 30% in 2027. Those figures do not mean technology is cheap by every measure, or that the sector is immune to disappointment. Stovall explicitly said investors should question the artificial intelligence trade rather than put it on autopilot. His conclusion was narrower: Recent pressure in technology, following concerns about Coreweave, did not justify treating all technology companies as a single trade or exiting the sector too quickly. Even though we did recently have a concern with Coreweave, you have to look individually at many of the tech stocks. But when you have a sector itself be as low as tech is, I don’t think you want to bail out too soon. Sam Stovall, when asked whether investors should rotate out of big technology stocks after pressure on the Artificial intelligence trade Stovall’s framework leaves room for both healthcare and technology in a portfolio. Healthcare is his preferred choice for investors seeking a blend of projected growth and defense. Technology remains a longer-term buying opportunity in CFRA Research’s view, based on projected earnings and valuation relative to its own history. The appropriate balance depends on an investor’s time horizon, risk tolerance, existing exposure to large-cap stocks, and willingness to accept technology’s sharper swings. How midterm-election history shapes Stovall’s sector view Stovall repeatedly emphasizes that history is a guide rather than gospel. His optimism about healthcare, energy, technology, and communication services partly reflects an unusual feature of this U.S. midterm election year: The market showed strength in the second and third quarters, periods he said have historically been negative. He said that, going back to 1990, a positive third quarter has been a reason to let winning sectors continue to run. Healthcare, energy, and technology were the three best-performing sectors in the third quarter, with communication services fourth, according to Stovall. He also said those four sectors had the strongest net debt-to-EBITDA profiles. Net debt to EBITDA compares a company’s debt, after cash, with a measure of operating earnings. Lower figures generally indicate less debt relative to earnings. Stovall sees that as an advantage if higher interest rates become a larger concern. His historical data also support the momentum case. Stovall said that the three best-performing sectors from March 31 of a midterm election year through the end of October beat the market by an average of 500 basis points over the following 12 months, and did so nearly 80% of the time. He added that the period from October 31 of midterm election years through October 31 of the following year had never declined since World War II and posted an average 16% gain. The limits of that evidence matter. Historical patterns can be informative without being predictive, especially when the number of comparable periods is small. Stovall made that qualification himself when discussing political outcomes. He said a Republican president with both houses of Congress controlled by the same party, a red wave, had produced a gain of more than 13% since World War II, but there were only 10 observations, which he said a statistician would not consider significant. Stock market sectors favored by CFRA Research for 2027 Sector Stovall’s rationale Main caveat Healthcare Projected 2027 earnings growth of about 22%, defensive characteristics, momentum, and midterm-election history Earnings estimates and historical patterns can change or fail to repeat Technology Projected earnings growth through 2027 and valuation below its historical relationship to earnings Individual companies should be evaluated separately after Artificial intelligence trade concerns Energy Among the strongest recent sectors and expected to have especially strong earnings growth Sector performance can be sensitive to energy prices and changing economic conditions Consumer staples Can provide defensive exposure during a safety trade Stovall expects limited earnings-growth support What could challenge the bull market and the healthcare case? Stovall remains bullish, but his outlook is not a forecast of uninterrupted gains. He identified disappointing earnings as the bigger threat to stocks than higher interest rates because elevated earnings expectations are supporting valuations. If corporate results fail to meet those expectations, the market could reprice itself even if bond yields remain manageable. He also pointed to high debt levels, including $40 trillion in government debt and retail margin debt (money borrowed by investors) relative to M2 (a measure of money supply) at an all-time high. High leverage can amplify selling when markets fall because borrowers may need to sell assets to meet lending requirements. On interest rates, Stovall said the pace of a rise in the 10-year yield mattered more than the level alone. He said he would become more concerned if the yield rose into a range of 5.25% to 6%, alongside several Federal Reserve rate increases over a short period. Even then, he cited 1994, when seven rate increases over 12 months doubled the Fed funds rate while the S&P 500’s peak-to-trough decline was less than 9%. That example is a reminder that a pullback and a bear market are different events. A correction is commonly understood as a decline of at least 10% from a recent peak, while a bear market is commonly understood as a decline of at least 20%. Stovall’s 1994 reference described a smaller pullback, not a correction or bear market. Investors should avoid treating one historical episode as a template for a future market response. The takeaway for investors considering healthcare in 2027 Stovall’s healthcare preference is best read as a decision framework rather than a command to make an all-or-nothing bet on the sector. For long-term, buy-and-hold investors, the first question is whether a healthcare allocation would improve diversification in a portfolio already dominated by technology, large-cap stocks, or other growth investments. The second is whether the investor agrees that healthcare’s projected earnings growth and defensive characteristics justify the price of the companies being considered. For investors who already own healthcare, Stovall’s argument supports reviewing whether the position still matches its intended purpose. A healthcare holding purchased only for defense may have a different role than one purchased for an earnings-growth opportunity. For investors adding exposure, diversification across companies may reduce the risk of relying on a single firm’s earnings report, regulatory developments, or operational setbacks. Stovall’s broader message is cautious optimism. He expects the bull market to continue but believes the trajectory of gains should slow to a mid- to high-single-digit advance for 2027. Healthcare stands out in his view because it does not require investors to choose entirely between offense and defense. Whether that combination proves attractive will depend on earnings results, valuations, interest rates, and the market’s appetite for risk. The practical task for investors is to decide whether the sector’s projected growth and defensive profile fill a genuine gap in their portfolios, rather than simply chasing the latest winner. Stovall’s case for healthcare is a selective one: He sees a sector with projected earnings growth above the S&P 500’s, defensive characteristics, and historical support in a midterm-election year. Some or all of this content may have been generated by AI. While we strive for accuracy, AI can occasionally produce incorrect information. If you buy something via one of our links, we may earn a commission.
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