In a market that Bank of America's Savita Subramanian calls "never more expensive," finding value has become increasingly challenging. But her team's quantitative model has identified two sectors that stand apart from the crowd: Health Care and Real Estate.
According to Bank of America's latest analysis, these sectors offer something rare in today's market—reasonable valuations combined with positive momentum. For investors seeking defensive positioning without sacrificing upside potential, this combination could prove compelling.
The Quantitative Case for Health Care and Real Estate
Bank of America's Momentum and Value model now ranks Health Care as the number one sector and Real Estate as number three. The firm has moved to overweight positions in both for investors with medium-term horizons of approximately 12 months.
"Health Care and Real Estate are inexpensive relative to historical market multiples. More importantly, the sectors are cheap for good reasons: positive trends in revisions compared to the broader market, plus a three-month run of outperformance."
— Savita Subramanian, Bank of America
Why Health Care Stands Out
The health care sector offers multiple tailwinds heading into 2026:
Demographic Drivers
An aging population continues to drive structural demand for healthcare services. The 65-and-older demographic is the fastest-growing age group in America, and their healthcare spending significantly exceeds younger cohorts.
Valuation Support
After underperforming during the AI-driven rally, health care stocks now trade at meaningful discounts to historical multiples. This creates an attractive entry point for value-oriented investors.
Defensive Characteristics
Healthcare spending tends to be non-discretionary, making the sector more resilient during economic downturns. If 2026 brings the volatility that many strategists expect, defensive sectors typically outperform.
Key Health Care Subsectors to Watch
- Managed care: Companies like UnitedHealth and Cigna benefit from stable membership and diversified services
- Large-cap pharma: Established drug makers with strong pipelines and dividend yields
- Healthcare REITs: Welltower and similar names benefit from aging demographics and stable occupancy
- Medical devices: Procedure volumes recovering post-pandemic
The Real Estate Opportunity
Real estate investment trusts (REITs) have faced headwinds from rising interest rates, but Bank of America sees a potential turning point.
Rate Sensitivity Works Both Ways
While higher rates pressured REITs in 2024-2025, any Fed rate cuts in 2026 could provide a tailwind. Philadelphia Fed President Anna Paulson recently suggested additional, modest rate cuts could be warranted later in the year.
Subsector Divergence
Not all real estate is created equal. Bank of America sees particular opportunity in:
- Data center REITs: Equinix and Digital Realty benefit from AI infrastructure demand
- Healthcare REITs: Senior housing demand rising with demographics
- Industrial REITs: E-commerce and reshoring drive warehouse demand
Valuation Reset
After significant declines from 2022 highs, many quality REITs now offer attractive dividend yields and trade below replacement cost. This provides a margin of safety that was absent during the pandemic-era peaks.
Why These Sectors Now?
Bank of America's recommendation timing reflects several converging factors:
1. Relative Value in an Expensive Market
With the S&P 500 expensive on 18 of 20 valuation metrics, sectors that still offer reasonable valuations become more attractive. Health Care and Real Estate screen as genuinely undervalued rather than simply "less expensive."
2. Momentum Turning Positive
Both sectors have shown three months of outperformance, suggesting institutional money is rotating in. Momentum strategies often capture trends before they become widely recognized.
3. Positive Earnings Revisions
Analyst estimates are being revised upward for these sectors while the broader market sees more mixed revisions. This fundamental improvement supports the technical momentum.
Implementation Strategies
For investors looking to add Health Care and Real Estate exposure, several approaches exist:
- Sector ETFs: Health Care Select Sector SPDR (XLV) and Real Estate Select Sector SPDR (XLRE) provide broad exposure
- Individual stocks: Focus on quality names with strong balance sheets and competitive moats
- Active funds: Managers with sector expertise can potentially add value through security selection
Risks to Consider
While Bank of America is constructive on these sectors, risks remain:
- Healthcare policy: Regulatory changes could impact drug pricing and reimbursement
- Rate sensitivity: If the Fed holds rates higher for longer, REITs could struggle
- Economic slowdown: A recession would impact all sectors, though defensives typically outperform
- Sector-specific risks: Patent cliffs for pharma, office occupancy for REITs
The Bottom Line
In a market characterized by elevated valuations and concentrated leadership, Health Care and Real Estate offer something different: genuine value combined with improving fundamentals.
Bank of America's quantitative model suggests these sectors deserve greater portfolio allocation for investors with 12-month time horizons. As the firm's Subramanian notes, these sectors are "cheap for good reasons"—not distressed, but simply overlooked in the rush toward AI-related names.
For those seeking to diversify away from the Magnificent Seven and position for potential volatility, Health Care and Real Estate may provide the defensive growth combination that 2026 demands.
