Editor’s Note: Jim makes the case today for small-cap healthcare as the overlooked beneficiary of a larger rotation — AI capital leaving mega-cap tech for sectors the market has been ignoring. His Personal Finance briefing names the specific companies at the center of that rotation. Read it →

I had my right knee replaced last week. The surgery went well and I’m confident that within a few months I’ll be back to my old self (literally).

My left knee was replaced two years ago by the same surgeon. He said then, “I’ll make your knee different, but better.”

He was correct. My left knee does feel different, and it is better. Now, I’m hoping for the same outcome for my right knee.

So are the other one million or so Americans that had some form of joint replacement surgery during the past year. And so is the medical industry, which raked in nearly $24 billion in sales from joint replacement surgery in 2025.

According to ORTHOWORLD, joint replacement “is orthopedics’ largest segment, accounting for 37% of the $65 billion overall market. Joint replacement’s mid-single digit growth rate has remained steady and could represent the “new normal” for the segment.”

Overlooked Niche

As a stock market analyst, numbers like that get my attention. I am always on the lookout for a niche of the economy that Wall Street has overlooked.

Especially when it comes to healthcare, which from Wall Street’s perspective consists primarily of pharmaceutical companies and not much else. Last year, pharmaceutical sales exceeded $500 billion in the United States.

The same demographic trends driving pharmaceutical sales apply to joint replacement. Collectively, we are an aging population with bodies that are breaking down.

When we were younger, we relied on pharmaceuticals such as Advil and Tylenol to relieve our aches and pains. But once that stops working, it’s time to have some new hardware put in our bodies.

Healthcare Recovery

With large cap stocks running out of steam, I expect small cap stocks to surge during the second half of this year. I’m also expecting the healthcare sector to perform better.

During the first half of this year, the iShares Global Healthcare ETF (NYSE: IXJ) gained 1 percent while the S&P 500 Index was up more than 9 percent. With so much money going into artificial intelligence (AI), there wasn’t much growth capital left for everyone else.

That is changing. The AI boom isn’t going away but it is going somewhere else. And one of the places it is going to is healthcare.

The replacement joint used in my knee surgery last week is different from the one used two years ago. This time, my new hardware came with software in the form a microchip that evaluates my stability, strength, and mobility using AI.

All that got me wondering if there is a pure play on joint replacement. Joint replacement surgery isn’t cheap and the barriers to entry are high. That limits the competition.

Hips, Shoulders, Knees and Toes

There are four companies that account for 71 percent of the global joint replacement market. They are Zimmer Biomet (NYSE: ZBH), Stryker (NYSE: SYK), Smith+Nephew (NYSE: SNN), and DePuy Synthes (private).

Of the three publicly traded companies on that list, only Zimmer Biomet derives nearly all its income from joint replacement surgeries. During the first quarter of this year, Zimmer Biomet recorded $2.1 billion in net sales.

When the company released its fiscal 2026 Q1 results in late April, it raised its guidance for adjusted earnings per share (EPS) and free cash flow for this year. However, a decline in its adjusted EPS during the first quarter is what the algorithms on Wall Street glommed onto.

That’s why ZBH has gained no ground this year. With a market cap of only $17 billion, the company is too small to command attention on Wall Street if it isn’t reporting strong earnings growth.

The Robots are Coming

However, that could soon change. In the press release accompanying its Q1 results the company noted that it “Completed enrollment in the multi-center clinical study in India of mBôs, a first-of-its-kind, surgeon-guided, autonomous robotic total knee arthroplasty system.”

The implications of that statement are enormous. Using a combination of AI and robotics, total joint replacement surgeries could soon be performed anywhere in the world using machines guided by surgeons thousands of miles away.

That day isn’t here yet, but it’s coming. In the meantime, me and all my baby boomer buddies will keep Zimmer Biomet busy with our creaky knees, arthritic hips, and sore shoulders.

That should keep Zimmer Biomet in good stead for another decade or so. After that, just about anyone in the world in need of joint replacement surgery will be a potential customer. That’s the kind of business I’d like to own a piece of!

The rotation I’ve been writing about in Personal Finance all year isn’t about healthcare specifically — but Zimmer Biomet (NYSE: ZBH) is a clean example of the type. A smaller business, overlooked by Wall Street because it isn’t reporting explosive earnings growth, with a structural tailwind that’s just beginning. These are the companies where I think the next decade’s returns are forming: not the chipmakers, not the hyperscalers, but traditional businesses quietly using AI to widen their margins while most investors still aren’t watching. See the full briefing and the portfolio I’ve built around it →