Mizuho's Jared Holz on why he is bullish on biotech heading into 2026

Healthcare Sector Outlook to 2026

Key Concepts:

• XBI (Nasdaq Biotechnology Index): A benchmark index for small and mid-cap biotechnology companies.
• IRA (Inflation Reduction Act): US legislation impacting drug pricing, allowing Medicare to negotiate prices for certain drugs.
• Most Favored Nation (MFN) Rule: A proposed rule aiming to tie US drug prices to those in other developed countries.
• Multiples (in Pharma): Valuation metrics used to assess the relative value of pharmaceutical companies, often based on earnings or revenue.
• Deal Mania/M&A Activity: A period of increased mergers and acquisitions within the biotech sector.

I. Sector Performance and Rotation (2023-2026)

The healthcare sector has been the best-performing sector over the last three months, driven by investor rotation away from high-growth tech and AI stocks towards more attractively valued opportunities. Jared Holtz, a healthcare strategist at Mizuho, believes this positive trend will likely continue into 2026. Healthcare has been a multi-year laggard, underperforming the S&P 500 by 20% in 2023 and approximately 5% in 2024. This underperformance suggests remaining potential for growth. The current rotation isn’t solely driven by fear of tech’s valuations, but also by increasing optimism regarding the healthcare sector itself.

II. Drug Pricing as a Catalyst

A significant factor contributing to the bullish outlook on healthcare is the easing of concerns surrounding drug pricing. Despite a “noisy” year with ongoing debate, several key developments are creating a more predictable environment. These include the implementation of the Inflation Reduction Act (IRA) in the coming year, discussions around the Most Favored Nation (MFN) rule, and agreements between a dozen pharmaceutical companies and the White House regarding pricing mechanisms. Holtz posits that resolving these uncertainties will positively impact the performance of pharmaceutical, biotech, and related companies.

III. The Analyst’s Perspective on Political Volatility

The role of a healthcare analyst is significantly impacted by political events, particularly presidential statements regarding drug pricing. Holtz describes waking up to a presidential tweet demanding a 30% reduction in drug prices as “nightmarish.” He notes that navigating these political uncertainties has been challenging under both the previous and current administrations. The process involves more than simply adjusting spreadsheets; it requires reassessing market multiples and investor sentiment. Interestingly, the recent increase in pharmaceutical multiples suggests investors are becoming more comfortable with the sector despite the political risks.

IV. Biotech as the Most Compelling Opportunity

Holtz identifies the biotech sector as the most interesting area for investment in the coming year. The XBI, a proxy for small and mid-cap biotech, has experienced an unprecedented six consecutive months of positive returns – a record since the index’s inception. Several factors are driving this positive momentum:

• Easing Drug Pricing Concerns: The diminishing negative narrative surrounding drug pricing is removing a significant headwind.
• Interest Rate Expectations: Anticipation of lower interest rates is contributing to investor confidence, although the correlation isn’t perfect.
• Reduced Asset Proliferation: The number of biotech assets requiring analysis has stabilized, making the sector more manageable for investors. Previously, an exponential increase in assets was a bearish signal.
• Increased M&A Activity: 2024 has seen a surge in merger and acquisition activity, with over $500 million in publicly traded equity deals (excluding private transactions). This “deal mania” signals confidence in the sector.

V. The Role of Artificial Intelligence (AI)

The potential impact of AI on drug discovery is viewed as generally positive. While pharmaceutical companies have been utilizing computer-guided models for drug discovery for nearly a decade, AI is expected to further accelerate the process. Holtz suggests that, on balance, AI will likely be a helpful tool, although the extent of its impact remains uncertain.

VI. Political Risk and Investor Caution

Despite the positive outlook, Holtz acknowledges the ongoing political risks within the healthcare sector. He highlights the potential for government intervention, such as scrutiny of health insurance company profits, as a source of concern for investors. The significant political attention and potential for policy changes necessitate a degree of caution.

Conclusion:

The healthcare sector, particularly biotech, is poised for continued growth into 2026. Easing drug pricing concerns, favorable macroeconomic conditions, and increased M&A activity are driving positive momentum. While political risks remain a factor, the current environment presents a compelling investment opportunity, especially within the biotech space, which is experiencing unprecedented positive returns. The analyst’s role remains challenging, requiring constant adaptation to political developments and market fluctuations.