Here is a fact that would have gotten you laughed out of a 2021 investment meeting: the hottest hedge against the artificial-intelligence trade is currently the healthcare sector. Pills and stents versus chips and data centers.
A hedge is simply something you own because it tends to go up when the rest of your portfolio goes down. The Journal’s Heard on the Street column lays out the evidence: chips and healthcare have developed a negative correlation, meaning when one zigs, the other reliably zags. Computer-driven funds have noticed, and now buy healthcare more or less automatically whenever the chips sell off.
How did the sector land this job? By losing, mostly.
The gap that built it
Over five years, the SMH semiconductor fund is up about 300%. The XLV healthcare fund is up about 25%. A decade ago, both sectors traded at 15–16 times forward earnings, like ordinary neighbors. Today chips fetch 22 to 30 times. Healthcare sits near 18.
A forward P/E sounds mysterious. It is not. It is what you pay today for one dollar of next year’s expected profit. In healthcare, that dollar costs about $18. In chips, it costs $22 to $30 — because buyers believe a great many more dollars are coming behind it. The gap is not medicine getting worse. It is expectations getting louder.
That is exactly what makes the unloved sector useful. When fear hits the expensive thing, money runs to the cheap, steady thing. In the 2022 bear market, healthcare beat the semiconductors by more than 30 percentage points. In the recent AI jitters, it did it again — 30-plus points of outperformance, both times.
Worth saying plainly for anyone living off a portfolio rather than admiring one: a hedge is not something you go buy after the trouble starts. It is a piece you already own, sitting there being boring — so the month the chips fall apart, you are not selling anything at a discount to pay the water bill.
| Measure | Semis (SMH) | Healthcare (XLV) |
|---|---|---|
| 5-year return | +300% | +25% |
| Forward P/E today | 22–30x | ~18x |
| Forward P/E a decade ago | 15–16x | 15–16x |
| 2022 bear + recent AI jitters | Healthcare won by 30+ points, each time | |
Cheap is not enough
Before anyone buys the whole sector with both hands: not all of it is created equal. Johnson & Johnson (JNJ) and Bristol-Myers Squibb (BMY) are both up about 40% over the past 12 months — same scoreboard, very different games. JNJ is a steady profit grower. BMY is staring down a patent cliff — the moment a drug’s patent expires and cheap copies flood in, like a lease running out on your best store. A cheap stock with fading profits is not a hedge. It is just cheap.
The names doing the actual work are the solid earners — Eli Lilly (LLY), JNJ, UnitedHealth (UNH), AbbVie (ABBV). It helps that the cloud over the whole group — fear of drug-pricing crackdowns and Medicare cuts — has been easing rather than building.
That easing deserves a moment. For years, the standing worry about healthcare stocks was Washington. The fight has not vanished. It has simply stopped being the loudest thing in the room — which is often all a cheap sector needs.
The tell
A Goldman Sachs analyst put the strange part best: the sector’s biggest force now “rests outside the sector.” Read that again. Healthcare stocks are moving on what Nvidia does, not on what the FDA does. Your grandmother’s pill maker has become the mirror image of the AI trade.
That is an odd job for a sector to hold. It is also a genuinely useful one — and in this market, useful and unloved is a combination worth owning.