healthcare shares have struggled this year but a handful of small stocks riding a wave of enthusiasm from artificial intelligence are bucking the trend the sp 500’s healthcare sector is little changed this year while the broad index has advanced 19 that is the largest underperformance for the sector since 1993 according to dow jones market data investors have lately flocked toward speculative investments such as shares of technology companies meme stocks and cryptocurrencies leaving behind more defensive sectors such as healthcare meanwhile companies perceived to be leading the ai revolution including chip maker nvidia and tech giant microsoft have been among this year’s top performing stocks the surge in enthusiasm has given a major boost to shares of smaller biotech companies a sector where investors give greater weight to growth opportunities than current financial results the nasdaq biotechnology index which is weighted by market value has shed 26 this year recursion pharmaceuticals rxrx 266increase green up pointing triangle stock has more than tripled since may the biotech upstart which uses aipowered models to identify new experimental drug candidates said earlier this month that it received a 50 million investment from nvidia and will license its models to other drugmakers to aid their own drug discovery efforts other firms implementing ai into their technology have also surged schrodinger sdgr 121decrease red down pointing triangle stock is up 162 this year the company which sells aienhanced software used in the drug development process said in may it expects to book 70 million to 90 million in revenue this year in its drug discovery unit up from 45 million a year ago shares of diagnostic imaging firm radnet rdnt 200decrease red down pointing triangle  which is using ai to interpret mammograms are up 80 this year while uslisted depository receipts of cancer drug developer exscientia exai 471increase green up pointing triangle are up 51 the four companies have a combined market value of about 93 billion according to factset these stocks now command premium valuations despite not earning consistent profits from airelated businesses as investors bet that sales will grow quickly recursion trades at 60 times its last 12 months of revenue while schrodinger trades at 18 times according to factset the sp 500 in comparison trades at 25 times the us spends about 43 trillion annually on healthcare according to data from the centers for medicare and medicaid services some industry executives and investors believe that ai if used to discover new drugs more efficiently or identify atrisk patients more quickly could reduce that tab and make new companies at the forefront of the technology more valuable major health systems and large companies such as johnson  johnson and hospital chain hca healthcare are experimenting with the technology testing it in some cases to answer questions from patients or to convert conversations between patients and doctors into clinical notes nvidia the market leader in chips needed to power the technology is investing in drug development “we do view it as very impactful as we think about our core business whether in operations drug discovery engaging with physicians” said jim swanson chief information officer at jj most health stocks have struggled in 2023 after outperforming the market last year large health insurers which make up a large chunk of the index have struggled to control costs in response to rising demand for elective surgeries while a boom in sales of vaccines treatments and tests for covid19 has waned meanwhile sweeping new legislation threatens to blunt drugmakers’ pricing power in the years ahead some on wall street think more airelated gains could be in store the rally is “something that investors should take pretty seriously on a nearterm basis” said will sevush healthcare equity strategist at jefferies because smallcap stocks can post dramatic gains when investors flock to a popular theme but sevush added that health companies must tread lightly to stay compliant with privacy regulations which means the industrywide rollout of the technology will be slow “it will be a long time before ai is driving industry economics” sevush said other strategists are skeptical that the rally will last “i feel like companies understand that focusing on ai as an angle or a narrative is increasing investor interest” said jared holz strategist at mizuho securities “ai at this point is more of a concept than a true money maker for most companies” justin simon portfolio manager at jasper capital management said the greatest potential for ai to meaningfully disrupt the industry is by helping to detect serious disease earlier in the process he owns shares of irhythm technologies irtc 015increase green up pointing triangle  which uses wearable sensors to detect heart arrhythmias in patients as a way to bet on the technology “the reality is 1820 of gdp is in healthcare and if you make a difference there there’s plenty of market opportunity” he said