What's happened
Despite lagging in 2025, healthcare stocks are expected to rebound due to strong earnings growth, upcoming M&A activity, and supportive policy developments. Analysts see catalysts like reshoring investments and AI integration fueling a recovery, with sector valuations still attractive compared to the broader market.
What's behind the headline?
The outlook for healthcare stocks is increasingly optimistic, driven by multiple catalysts. Morgan Stanley analysts highlight that despite a year of underperformance, fundamentals remain strong, with earnings growth surpassing the broader market. The sector's defensive nature and employment trends—healthcare adding jobs consistently—suggest resilience even in economic downturns.
Key factors supporting a rebound include:
- Reshoring investments by biopharma firms like Eli Lilly and AstraZeneca, reducing exposure to tariffs and supply chain risks.
- Policy clarity on drug pricing, with agreements reached between firms and the government, easing investor concerns.
- Patent expiries creating M&A opportunities, as companies seek to acquire or develop new drugs.
- AI integration improving operational efficiencies and regulatory processes.
While some risks remain, such as potential overvaluation and the impact of AI capex slowdown, the sector's valuation at a 30% discount to the S&P 500 makes it attractive. The recent uptick in M&A activity and manufacturing investments signals a positive shift, suggesting that healthcare stocks will likely continue their upward trajectory in the coming months.
What the papers say
Business Insider UK reports that Morgan Stanley analysts see catalysts like reshoring, policy clarity, and AI opportunities as key to a sector rebound. They note that despite a mixed performance in 2025, healthcare stocks have gained momentum, with M&A activity rising and valuations remaining attractive.
Meanwhile, Business Insider UK also highlights that some investors are cautious about overvaluation and potential AI capex slowdown, citing concerns from BCA Research. The firm warns that a pullback in AI investment could threaten the sector's growth, especially if large tech firms reduce spending.
Overall, the contrasting views reflect cautious optimism: analysts see strong fundamentals and policy support, but acknowledge risks from market overexuberance and technological shifts. The sector's defensive qualities and recent momentum suggest a likely recovery, but investors should remain vigilant to emerging risks.
How we got here
The healthcare sector experienced a downturn earlier in 2025, driven by regulatory concerns and policy uncertainties. However, earnings growth outpaced the broader market from mid-2024 to mid-2025, indicating underlying strength. Recent momentum and policy clarity, including drug price reforms and reshoring investments, have set the stage for a potential rebound.
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