Where Should Healthcare Investors Look in 2026?

February 10, 2026  |  Healthcare investment strategies

Mike Rawaan, Founder and Managing Director

The recent tech sector correction has sent institutional investors searching for portfolio balance. With the "Magnificent Seven" tech stocks collectively losing around $1 trillion in market value in late January 2025—including Nvidia's staggering $600 billion single-day loss— the question isn't whether to diversify, but where.

For many investors, healthcare offers a compelling answer. But not all healthcare sectors are created equal in 2026.

The Broad Portfolio Rebalancing Question

Before diving into healthcare specifically, it's worth considering the broader strategic shifts investors are weighing:

Defensive sectors such as utilities, consumer staples, and financials are attracting renewed interest. Healthcare sits firmly in this category, offering counter-cyclical characteristics and lower correlation with tech volatility.

International diversification is back on the table after years of US tech dominance. Emerging markets and European equities trade at significant discounts to US counterparts.

Fixed income has become relevant again. With yields still attractive relative to the zero-interest-rate era, bonds provide actual income and diversification benefits that were largely absent during the 2010s.

The real work for institutional investors is revisiting asset allocation models with updated expected returns across asset classes, acknowledging that the 60/40 portfolio conversation has legitimate merit again.

Healthcare Sectors Drawing Institutional Interest

Within healthcare, several sectors stand out for 2026:

1. GLP-1 and Obesity Care Ecosystem

The weight loss drug market continues its explosive expansion beyond Novo Nordisk and Eli Lilly. The opportunity extends across the entire care delivery chain:

• Specialty pharmacies managing distribution

• Telehealth platforms enabling access

• Compounding pharmacies filling supply gaps

• Adjacent services managing downstream effects on other conditions

This represents a fundamental market expansion story, not just a pharmaceutical product cycle.

2. Healthcare AI and Workflow Automation

While broader tech AI stocks corrected following DeepSeek's announcement on the R1 model in early 2025, healthcare-specific AI applications show clearer return on investment:

• Clinical documentation improvement

• Prior authorization automation

• Revenue cycle management optimization

• Workflow solutions with proven ROI and regulatory pathways

The key differentiator: companies solving actual workflow problems rather than speculative use cases.

Word of advice: Stay away from AI applications that aim to solve complex challenges where multiple stakeholders must play along for the ROI to materialize.

3. Value-Based Care Enablement

Despite Medicare Advantage headwinds—including the historically low 0.09% payment increase in the 2027 CMS Advance Notice—the fundamental shift toward risk-based care models continues. Technology platforms and services that help providers succeed in value-based arrangements remain attractive, particularly those that support emerging CMMI models.

Click here for a thorough analysis of the 2027 CMS Advance Notice to Medicare Advantage

4. Behavioral Health

Strong fundamentals persist across multiple dimensions:

• Continued demand growth

• Policy tailwinds for mental health parity enforcement

• Integration into primary care and Medicare Advantage plans

• Maturation beyond early telehealth hype into sustainable care delivery models

5. Home Health and Hospital-at-Home

Demographic drivers remain powerful while policy support expands:

• Aging population creating structural demand

• CMS continuing to expand reimbursement frameworks

• Proven value proposition: lower costs with better patient experience

• Technology enablement through remote monitoring creating additional market opportunities

6. Biosimilars and Generic Specialty

As more biologic drugs lose exclusivity and Inflation Reduction Act pricing pressures mount on branded drugs, companies positioned in biosimilar and generic specialty markets benefit from clear policy tailwinds.

7. Healthcare Services Consolidation

Private equity and strategic buyers continue hunting for platforms in fragmented services markets:

• Urgent care centers

• Institutional post-acute care (skilled nursing and long-term care facilities)

• Ambulatory surgery centers

• Diagnostic imaging facilities

• Specialty practices where consolidation drives operational improvement

What Looks Less Attractive

Not every healthcare sector offers compelling risk-adjusted returns in 2026:

• Traditional Medicare Advantage plans face significant rate pressure and Stars program challenges that will compress margins.

• Hospital systems with weak payer mix and high labor costs struggle with negative operating dynamics.

• Pure-play telehealth without clinical differentiation or unique care delivery models faces commoditization.

• Healthcare IT companies with long sales cycles and unclear ROI face scrutiny in a capital-efficient environment.

  Note: Healthcare IT companies that solve multiple problems through cohesive, comprehensive, and customizable workflows are still moderately attractive.

The Investment Thesis

The overarching theme for healthcare investors in 2026: seek exposure with clear paths to profitability, proven unit economics, and policy tailwinds rather than speculative bets. The challenge isn't understanding this principle—it's accurately assessing where any given company falls on the proven-to-speculative spectrum.

Healthcare offers what many institutional investors need right now—defensive characteristics, demographic tailwinds, and specific subsectors with compelling growth narratives that don't depend on multiple expansion or speculative technology adoption.

The sector sits at a unique intersection: mature enough to offer stability during tech volatility, yet dynamic enough to deliver growth through innovation in care delivery, technology-enablement, and business model evolution.

For investors reassessing portfolio allocation after the tech correction, healthcare isn't just a defensive play—it's an opportunity to balance growth and stability in an uncertain market environment.

About Covalence Health: Covalence Health works with healthcare investors to separate signal from noise. Our team brings 250+ years of collective healthcare industry experience to help VC and PE firms evaluate opportunities, conduct operational due diligence, and drive strategic planning post-acquisition. We focus on what matters: helping portfolio companies achieve the operational improvements and growth trajectories that deliver returns.