By Jacob Sonenshine

Healthcare stocks have been the sick man of the S&P 500 this year. They're ready for a revival.

Sure, 2025 has been unpleasant. The Health Care Select Sector SPDR exchange-traded fund has fallen 3.7% this year, far worse than the S&P 500's 7.1% rise. The ETF includes everything from insurers to pharma companies to medical-device makers, and that diversity usually helps the group weather the tough times.

This year, though, every corner of the sector is feeling the pain. Health insurers like UnitedHealth Group, Cigna, and Humana have seen reimbursement costs skyrocket, causing their shares to tumble. Pharma stocks, too, have been under pressure due to the Trump administration's efforts to lower drug prices, Robert F. Kennedy Jr.'s remaking of the Food and Drug Administration, and the potential for tariffs to raise costs. Even Eli Lilly, the obesity-drug maker no one could get enough of during 2023 and 2024, is down this year on concerns about competition.

The good news: The healthcare ETF has stabilized. At Tuesday's close of $132.50, it has found support once again near $130, the level that has attracted buyers since the S&P 500's early April selloff. What's more, the fund has remained in a long-term uptrend since early 2009, suggesting that the recent dip is one to buy.

Even some beaten-down healthcare stocks are showing signs of life. Pfizer, for instance, jumped 4% on Tuesday after it beat analyst estimates on both the top and bottom lines. Merck, meanwhile, refuses to drop below $77 even after selling off following a sales miss. The news will have to be worse -- perhaps much worse -- for these stocks to have more downside.

And darn, don't their valuations look attractive. The broader healthcare ETF is trading at just over 16 times expected aggregate earrings for the coming 12 months, 27% lower than the S&P 500's just over 22 times. That's a particularly steep discount, about double the average over the past decade.

What's more, healthcare stocks are expected to grow their earnings at an 11% annual clip in the two years after 2025, according to FactSet. That's driven by strong growth from Lilly's fast-growing obesity business and medical-device makers, including Boston Scientific, Stryker, Intuitive Surgical, and ResMed. And those earnings aren't a pipe dream, writes Trivariate Research's Adam Parker, who recommends the sector. "[Healthcare's] earnings estimate achievability is above average," he argues.

The sector is far from healthy, but the risk/reward in healthcare stocks sure is. And that should be enough.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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August 06, 2025 04:30 ET (08:30 GMT)

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