What's the prognosis for health

It's hard to find investors and analysts who aren't bullish on health care.

The S&P Health Care Sector gained more than 10 percent in the first half of the year, compared with just over 6 percent for the broader S&P 500, and the Health Care Select Sector SPDR ETF is at all-time highs.

Well, count BMO Capital's Brian Belski among the health-care bears, at least for the second half of the year. He's telling clients to ease up and maintain a more neutral position on the sector.

'I always worry when there's a very crowded long trade,' the investment strategist explained. He said he finds sentiment among his fund manager clients remains overly bullish on health-care names. But Belski insists he's not just playing contrarian.

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'The biggest problem is that people aren't seeing that health care has become very expensive,' he explained. He said he expects valuations on big-cap health stocks are less attractive after this year's run-up, and small caps have been too volatile-most notably in the biotech sector.

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Michael Gregory, health-care portfolio manager at Highland Capital, said the health-care sector's premium to the S&P 500 has narrowed. His fund went short on the biotech sector earlier this year, but he remains long when it comes to health-care services and facilities.

'We're still very constructive on hospitals,' which he argued are trading at attractive valuations of about eight-times their cash flow. 'We think that there's significant upside in the stocks.'

Checking in on mental health

Gregory is positive on HCA and Community Health, both of which saw their stocks gain more than 15 percent in the first half of the year. Longer term, he's very bullish on the in-patient mental health hospitals, Universal Health Services and Acadia Healthcare.

'There's a supply-demand imbalance for inpatient behavioral health,' he contended, especially with new regulations that expand mental health coverage under the Affordable Care Act, which is also known as Obamacare.

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'Both Acadia and Universal Health Services benefit from 6 percent annual volume growth,' when it comes to admissions, he said.

While Acadia Healthcare's shares have underperformed its peers-shares are flat year-to-date-Gregory said he expects the company's acquisitions position it for strong growth ahead. It struck its latest deal in early June-an agreement to acquire British behavioral health provider Partners in Care for $660 million-and the acquisition is expected to boost earnings in 2014.

Gregory is also positive on the health-insurance sector, though one of his favorite picks is brokerage and benefits consultancy Aon. He said he expects its private health insurance exchange business will continue to grow as employers look to reduce health costs by switching to defined benefit plans.

As for insurers' stocks, the prospect of rising medical costs is beginning to worry investors.

Will medical inflation deflate insurers?

The pullback in medical cost inflation in the wake of the 2008 financial crisis provided health insurers with an earnings cushion. That attracted a number of new investors, Wedbush Morgan analyst Sarah James observed in a recent research note to clients.

'Five years of large earnings beats has brought in a number of momentum investors to the space,' James wrote.

Although the government reported a drop in medical spending during the first quarter of this year, medical costs are expected to become more of a headwind in 2015, James said.

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'We believe over the next two years, we will return to more predictable earnings with smaller beats,' she said.

She said she expects health insurers' second-quarter earnings will exceed earnings expectations, and that most of the major carriers will boost their outlooks for this year.

Molina Health remains one of James' top picks because the Medicaid-focused insurer's conservative revenue guidance will have set the company up for bigger earnings beats than its peers.

When it comes to Medicare players, James said she expects Humana, the nation's largest Medicare Advantage insurer, to continue to post above-average growth, while maintaining profit margins.

Obamacare: Fall elections key

For the last several years, health insurance and hospital stocks have benefitted from the expectation of insurance coverage expansion under the Affordable Care Act. The last two quarters of the year should bring greater clarity on the medical costs incurred by new exchange plan members and newly covered Medicaid recipients.

Just over half of states have expanded Medicaid under the Obamacare law at this point, with most Republican-led states opting out. Highland's Gregory said he expects that politics will shift, as the industry puts pressure on state legislatures not to forego federal the funding under the program.

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'We're going to pivot from a political rational to say no, to an economic rational to say yes,' Gregory said. 'My view is you're going to see a perpetual domino effect to states expanding Medicaid...which provide a tailwind to insurers and to hospitals.'

But BMO's Belski said the congressional elections in November could alter the playing field, if Republicans take control of the Senate.

'The whole thing could be up in the air in the next six months,' he said. 'I think the construct of the health care bill will look dramatically different over the next five years.'

-By CNBC's Bertha Coombs