By Lewis Krauskopf
NEW YORK (Reuters) -Woes for U.S. healthcare stocks have worsened this year driven partly by Trump administration policies, although some investors are betting that the beaten-down shares are now becoming too much of a bargain to pass up.
The S&P 500 healthcare sector — which includes pharmaceutical companies, biotechs, health insurers and medical equipment makers — has slumped 5% in 2025, lagging the over 7% gain for the overall index.
Pressure to bring down U.S. prescription drug prices to overseas rates, tariffs targeted at pharmaceuticals and cuts to areas such as health research funding and Medicaid are among the Trump administration actions clouding the outlook for the shares this year, investors said.
Regulatory obstacles are compounding issues, including expiring drug patents and setbacks for bellwethers including UnitedHealth Group.
“You have got this constant overarching political and regulatory overhang that doesn’t really seem to subside with any administration,” said Jared Holz, healthcare sector strategist at Mizuho Securities. “When you have so much nebulousness around the sector, it turns people off rather than invites them to the party.”
In another sign of the group losing favor, healthcare exchange-traded-funds have seen 12 consecutive months of net outflows as of July for a total outflow of $11.5 billion in that time, more than for any other sector, according to State Street Investment Management.
The performance picture is even dimmer over a longer period. While shares of massive technology companies pushed the benchmark S&P 500 up over 50% the past three years, the healthcare sector is little changed in that time.
That gap has put the 60-stock sector at nearly its biggest discount to the broader market in 30 years, which some investors hope is an inflection point for the battered group.
“The valuation is extremely cheap and the relative performance is at an extreme,” said Walter Todd, chief investment officer at Greenwood Capital, whose healthcare holdings include diversified giant Johnson & Johnson and medical device maker Stryker.
“So at this point, it seems like a pretty decent setup to get some outperformance.”
The price-to-earnings ratio for the healthcare sector, based on earnings estimates for the next year, has fallen to 16.2 times from nearly 20 a year ago, according to LSEG Datastream.
Meanwhile, the S&P 500’s rally to records has driven the index’s P/E ratio to over 22 times — giving the broader market a significant premium over the healthcare sector.
‘BAD NEWS IS PRICED IN’
Some high-profile healthcare names are at even cheaper valuations. For example, Merck is trading at a forward P/E of 8.7, against its long-term average of 14.5, while fellow drugmaker Bristol Myers Squibb trades at 7.4 against its average of 15.8, according to LSEG.
Year-to-date, shares of both Merck and Bristol Myers are down roughly 20%.
The group is drawing bets from some value investors such as Patrick Kaser, portfolio manager at Brandywine Global, whose portfolio is overweight the sector including owning shares of CVS Health and European drugmakers GSK and Sanofi.
“Our perspective is a lot of this bad news is priced in and then some,” Kaser said. “To bet against the sector from here, you’re essentially continuing to bet on the valuation gap, which is already large, continuing to widen.”
The group’s decline means the total market value of the S&P 500 healthcare sector is about $4.8 trillion, not much higher than the $4.3 trillion value of Nvidia, the semiconductor company that has symbolized the artificial intelligence boom.
Indeed, some investors said a shift in capital away from Nvidia and other massive tech companies could spark healthcare shares. Such a move appeared to occur in the first quarter, investors said, when the healthcare sector rose 6% while declines in tech and megacap stocks dragged indexes lower.
Fears of an economic downturn also could help healthcare shares, at least on a relative basis. The group is often viewed as a defensive area in rockier economic times.
Economic fears flared following last Friday’s weaker-than-expected employment report, while some strategists say the market could be due for a pullback after surging over 20% since its April lows.
“During the first quarter, healthcare did great even as tech rolled over, as the fears of an economic slowdown got to more economically sensitive stocks,” said Chris Grisanti, chief market strategist at MAI Capital Management, adding he expects healthcare “will perform better in a more difficult market.”
More clarity on regulatory issues, including tariffs, also could support healthcare, investors said.
But some value investors are hesitant to dive into the group. Michael Mullaney, director of global markets research at Boston Partners, said he is wary some healthcare shares could be “value traps,” preferring to overweight areas including industrials or financials.
“There’s been just so much of an overhang in the sector,” Mullaney said. “There are better places to go with cleaner stories.”
(Reporting by Lewis Krauskopf; additional reporting by Laura Matthews and Suzanne McGee; Editing by Bill Berkrot)
Comments