Welcome back to Day Three of my series on the most important investment themes for 2026. Today we’re focusing on a sector that spent years lagging behind the broader market… then finally came alive in 2025 - and is now positioned to build on that momentum in a big way.
I’m talking about biotech - one of the most explosive sectors in every major bull market, and one that went from being ignored to quietly outperforming in 2025 – Nasdaq Biotech Index up nearly 30% this year.
Even with this year’s rebound, biotech remains deeply undervalued, misunderstood, and still early in what I believe is a multi-year resurgence.
Why Biotech Is Poised for Continued Strength in 2026
Biotech’s late arrival to the current bull market actually makes the opportunity even more compelling. While AI and the Magnificent Seven stole the spotlight, biotech spent several years digesting losses, consolidating, and rebuilding. When sentiment finally turned in 2025, the sector showed what happens when years of pessimism meet a spark of optimism - a powerful, broad-based rally.
And with the fundamental backdrop improving, that momentum has room to run.
1. Policy Overhang Fading - Turning into a Potential Tailwind
Uncertainty around U.S. healthcare policy weighed heavily on biotech in prior years. Drug pricing debates, regulatory questions, and Medicare reimbursement issues all kept investors on the sidelines.
But now, as we head deeper into 2026, policy clarity is emerging - especially around pricing frameworks and innovation incentives. Historically, once regulatory fear peaks, biotech enters some of its strongest uptrends.
2. Lower Interest Rates = Higher Biotech Valuations
Few sectors benefit more from falling interest rates than biotech.
Lower rates improve:
The cost of capital (borrowing)
Funding for clinical development
IPO and secondary market activity
Discounted cash flow valuations
As the rate environment eases, capital is returning - and biotech is one of the first places it flows.
3. The Coming M&A Supercycle
Big Pharma is staring at one of the largest patent cliffs in history between 2027 and 2029. Billions in revenue will disappear as major drugs lose exclusivity.
The only solution? Acquire innovation.
This is why M&A activity is expected to surge over the next 18–24 months - and historically, M&A cycles have delivered some of biotech’s biggest individual stock returns, especially in the mid- and small-cap space.
4. Breakthrough Innovation Is Accelerating
Even during the years biotech lagged, the science never slowed down.
We’re seeing breakthroughs in:
Gene editing and next-gen CRISPR
Cell therapy, including solid tumor approaches
Obesity and metabolic treatments
Oncology, with targeted therapies and ADCs
Rare disease therapeutics with high pricing power
Layer AI-driven drug discovery on top - compressing timelines and improving hit rates - and you get a sector where innovation is compounding.
* More on the specific biotech investment opportunities tomorrow.
5. Long-Term Demand Is Unstoppable
Biotech sits at the intersection of global megatrends:
Aging populations
Rising chronic disease
GLP-1 reshaping metabolic health
Global healthcare investment expanding
More focus on longevity
No matter what happens politically or economically, these forces don’t reverse.
The Bottom Line
Biotech is no longer a turnaround story - it’s a momentum story.
A sector that finally caught fire in 2025 is stepping into 2026 with:
Renewed investor interest
Lower rates
A massive M&A cycle
Innovation running hot
Secular demand
And valuations still far below historical norms
Biotech isn’t just participating in this bull market - it’s becoming one of its most compelling leadership candidates.
Tomorrow, we’ll look at where the biggest biotech opportunities are forming - and why certain sub-sectors may lead the next leg higher.
Talk soon,
Matt McCall
Founder, NXT Wave Research
