Answer
For a Deployment, ArgoCD checks the rollout status: it's Healthy when the desired replicas are updated, available, and the rollout has completed; Progressing while pods are still rolling; and Degraded if it fails to progress (e.g., timeout, unavailable replicas). It reads the Deployment status conditions to decide.
Real-world example A Deployment stuck with unavailable replicas past its progress deadline is reported Degraded.