Struggling US Healthcare Stocks Face Tough 2025, Attracting Bargain Hunters

U.S. Healthcare Stocks Face Challenges Amid Political and Regulatory Pressures

U.S. healthcare stocks have experienced a difficult year, with many investors expressing concerns over the sector's performance. The S&P 500 healthcare sector, which includes pharmaceutical companies, biotechs, health insurers, and medical equipment makers, has declined by 5% in 2025. This lags behind the overall index, which has gained over 7%. The challenges faced by the sector are multifaceted, with political and regulatory pressures playing a significant role.

One of the main factors contributing to the sector’s struggles is the Trump administration’s policies aimed at reducing prescription drug prices to match those in other countries. Additionally, tariffs on pharmaceuticals and cuts to areas such as health research funding and Medicaid have created uncertainty for investors. These actions have cast a shadow over the outlook for healthcare shares, making them less attractive to some investors.

Regulatory obstacles are also compounding the issues. Expired drug patents and setbacks for major players like UnitedHealth Group have further weakened the sector. Investors are increasingly concerned about the constant political and regulatory overhang that seems to persist regardless of the administration in power. This uncertainty has led to a lack of confidence among investors, who are hesitant to invest in the sector.

Another sign of the sector losing favor is the net outflows from healthcare exchange-traded funds (ETFs). As of July, these ETFs have seen 12 consecutive months of net outflows, totaling $11.5 billion. This is more than any other sector, indicating a growing disinterest in healthcare stocks.

The long-term performance of the healthcare sector is even more concerning. While technology companies have driven the S&P 500 up by over 50% in the past three years, the healthcare sector has remained largely unchanged. This gap has put the 60-stock sector at nearly its biggest discount to the broader market in 30 years, leading some investors to believe this could be an inflection point for the battered group.

Investors like Walter Todd, chief investment officer at Greenwood Capital, see the current valuation as extremely cheap and the relative performance as extreme. He believes it's a good opportunity to gain outperformance. The price-to-earnings (P/E) ratio for the healthcare sector, based on earnings estimates for the next year, has dropped to 16.2 times from nearly 20 a year ago. In contrast, the S&P 500's P/E ratio has risen to over 22 times, giving the broader market a significant premium over the healthcare sector.

Some high-profile healthcare names are trading at even cheaper valuations. For example, Merck is trading at a forward P/E of 8.7, compared to its long-term average of 14.5, while Bristol Myers Squibb trades at 7.4 against its average of 15.8. Year-to-date, shares of both companies have declined by roughly 20%.

Value investors like Patrick Kaser, portfolio manager at Brandywine Global, are betting on the sector, believing that much of the bad news is already priced in. He argues that betting against the sector would mean continuing to bet on the valuation gap, which is already large and potentially widening.

The decline in healthcare stocks has also led to a situation where 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, a semiconductor company symbolizing the AI boom. Some investors believe that a shift in capital away from tech companies could spark a rebound in healthcare shares.

Economic fears could also benefit healthcare stocks, as the sector is often viewed as a defensive area during uncertain times. Recent economic data, including a weaker-than-expected employment report, has heightened fears of an economic downturn. Some strategists predict a market pullback after a surge of over 20% since April lows.

More clarity on regulatory issues, including tariffs, could support healthcare stocks. However, some value investors remain cautious. Michael Mullaney, director of global markets research at Boston Partners, warns that some healthcare shares could be "value traps," preferring to overweight areas like industrials or financials.

Despite the challenges, some investors see potential in the healthcare sector, particularly given the current valuations and the possibility of a shift in market sentiment. The sector's performance will likely depend on how regulatory and economic factors evolve in the coming months.