Why 2026 Is Pivotal for MedTech: Valuations, M&A & Top Stock Picks

KeyBanc’s research note signals a strategic inflection point in the MedTech sector: valuation multiples that once priced in growth and defensibility have largely eclipsed, creating potentially favorable entry points for investors. The fact that the S&P 1500 Equipment & Supplies Index trades at just a 2% forward P/E premium versus the S&P 500—down from an average five-year premium of ~25%—indicates both compression and resetting of expectations.

Demand metrics—hospital utilization, procedure volumes, and alertness of early indicators—are showing renewed strength. KeyBanc’s proprietary data reveals mid‐ to high‐single digit growth in hospital volumes in late 2025, while companies like JNJ and ABT have issued increasingly positive forward guidance and revenue preannouncements. This supports the view that underlying fundamentals are recovering, not just presentational.

On the M&A front, 2025 already surpassed the prior three years in both aggregate deal value and count. Boston Scientific’s purchase of Penumbra is a high profile catalyst for 2026: at ~$14.5B enterprise value, with ~73% cash/$11B financed through cash and debt, it demonstrates the willingness of strategic acquirers to pursue scale and growth exposure despite near-term dilution.

KeyBanc’s upgraded names—Solvay, LivaNova, ICU Medical, STERIS—are emblematic of different “sweet spots.” Some are undervalued after recent underperformance, others have leveraged product innovation or end-market exposure to outgrow the market. For example, Solvay’s post-3M spin-off execution and Solvay (or “Solventum” in one source) growth targets are raising confidence that 2026 guidance may be conservative.

However, several strategic risks deserve attention. First, while deal activity is accelerating, integration costs and first-year earnings dilution—as shown in Boston Scientific’s wish to accelerate growth but expect ~$0.06-$0.08 EPS dilution in year one post-Penumbra—could weigh on short-term returns.

Second, regulatory and reimbursement risks remain material. Investors must watch for changes in policy (tariffs, FDA/Medicare rules) that could offset gains. Third, valuation recovery depends on sustaining margin improvements, structural growth drivers (e.g., aging demographics, vascular/neurovascular demand), and product differentiation. Finally, market macro risks—rate hikes, inflation, supply chain constraints—remain nontrivial.

Strategic implications:

• Selective exposure is now more important than ever—identifying companies with durable growth, strong cost discipline, and differentiated product pipelines.
• M&A will likely remain a major lever—both for scale players and those seeking to bridge gaps in therapy or geography.
• Capital allocation (debt capacity, cash use, stock vs. buybacks) will become a key differentiator.
• Recovering valuation premium depends on execution: margin expansion, product innovation, favorable reimbursement. Underperformance in these areas could widen the valuation discount.

Open questions:

• Can companies deliver consistent growth in volumes while managing inflationary pressures and supply chain cost shocks?
• Will regulatory shifts (e.g., in device reimbursement, trade policy) materially alter forecasts?
• How will investors weight short-term dilution vs. long-term accretion in assessing M&A?
• Can valuation premiums restore meaningfully, or will compression represent a new baseline?