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Over the past year, the best-performing S&P 500 sector was communication services, followed by information technology. This might not surprise some, but with us now in 2026, I don’t think either of those two areas will be the best place to invest. Rather, I think it could be another sector that could steal the limelight this year!
An easy pill to swallow
My pick for 2026 is healthcare. Last year, it jumped 12.4%. Healthcare demand isn’t tied directly to the economic cycle the way other sectors are. For example, consumer discretionary or industrials are much more dependent on how well the broader US economy’s doing. But when it comes to medicine, people still need care regardless of the economic backdrop.
Yet it’s not just a defensive pick for 2026. The sector’s seeing large-scale breakthroughs that could really boost related stocks. A big one I’m thinking of is the rise of GLP-1 obesity and diabetes drugs. Another one is making use of AI for faster and more accurate drug discovery and diagnostics.
Finally, I think the valuation’s attractive. The largest healthcare sector ETF has a price-to-earnings ratio of 26.49. This contrasts with the broader S&P 500 average of 31.28. So by thinking about where the best value is right now, healthcare again ranks highly.
Of course, this is just my view. The sector might not be the best in the index if the AI build-out continues. If investor optimism remains high, communication services (including Meta and Alphabet) could steal the show. Or if interest rates fall faster than anticipated, the real estate sector and related US stocks could see large investor interest.
Specific targets
It’s possible to buy a sector tracker and invest passively. There’s nothing wrong with this, but I think some individual shares look particularly attractive. Eli Lilly‘s (NYSE:LLY) a good example here.
The stock’s surged 39% over the last year, fuelled by demand in GLP-1 products such as Mounjaro and Zepbound. Revenue in Q3 increased 54% versus the same period last year to $17.6bn, with these drugs specifically called out in driving this. Further, with the potential for much more widespread adoption, some of the share price increase is based on the future revenue potential.
Beyond obesity therapies, Lilly has an expanding pipeline in oncology and other therapeutic areas. Another appeal of owning the stock is the diversification of revenue. It’s a broad-based healthcare company, so if the sector as a whole does well, Eli Lilly stock should mirror the performance.
In terms of risks, there’s growing pressure from US regulators to lower drug costs. This could impact profit margins going forward for the company.
Even with this concern, I think it’s a stock for investors to consider, as a way to get exposure to the sector.
This story originally appeared on Motley Fool
