By One of the most unloved stock market sectors over the past two years looks poised for big gains in 2025, according to top strategists on Wall Street.
Healthcare stocks have floundered over the past two years, delivering the worst stretch of underperformance relative to the S&P 500 since at least 1991.
Janus Henderson
The underperformance accelerated toward the end of last year after President Donald Trump said he would nominate Robert F. Kennedy Jr. to lead the Department of Health and Human Services.
RFK Jr. has long been a vaccine skeptic, and some of his past comments have criticized groundbreaking drug developments, like GLP-1 injectables for the treatment of obesity.
However, investors may have gotten ahead of themselves in fearing Kennedy’s negative impact on the sector. According to strategists at Janus Henderson, Citi, and State Street, the sharp sell-off in healthcare stocks represents a buying opportunity.
“We believe the selling is overdone, with the market not fully appreciating the acceleration of innovation in healthcare and overreacting to near-term headwinds,” Andy Acker and Dan Lyons, portfolio managers at Janus Henderson, said in a recent note.
Acker and Lyons noted that while RFK Jr. is likely to lead the Department of HHS, he will be limited in his ability to stop the continued innovation and rollout of new drugs.
That responsibility falls to the Food and Drug Administration, and Trump’s pick to lead that agency, Dr. Martin Makary, is a well-respected physician who should serve as a counterbalance to RFK Jr., according to Acker and Lyons.
Analysts at Citi echoed this view, arguing in a note on Thursday that RFK Jr.’s Senate confirmation hearing was “heavy on soundbites” but ultimately had few surprises.
The analysts noted that during the confirmation hearing, RFK Jr. distanced himself from the anti-vaccine movement and voiced support for HIV treatment and prevention drugs.
The hearing provided “reassurance to us an RFKJ-led HHS is unlikely to generate headline volatility to the extend many investors had feared,” Citi said.
The analysts added that RFK Jr.’s likely confirmation to lead HHS could ultimately provide “measured upside” to the healthcare sector.
Michael Arone, chief investment strategist at State Street, said his top surprise for the stock market in 2025 is that the healthcare sector will outperform the S&P 500.
He highlighted that the healthcare sector’s weighting in the S&P 500 has declined to a 25-year low of about 10%. Yet, over roughly the same time period, total US healthcare spending has more than tripled, from $1.4 trillion in 2000 to $4.9 trillion in 2023.
“All this bad news for the Health Care sector creates an unloved investment opportunity with a compelling valuation, ripe for an upside performance surprise,” Arone said.
Arone highlighted that while the sector trades at a steep valuation discount relative to the S&P 500, it’s expected to grow its earnings faster than the market benchmark over the next five years.
Looking even further out, Arone said that the aging demographic profile of developed nations should boost healthcare spending considerably as people live longer.
“With people living longer, a growing portion of healthcare spending will go toward preventive care. And, aided by artificial intelligence, research will continue to develop breakthrough medicines for cancer, heart disease, and Alzheimer’s, among other illnesses,” Arone said.
Year-to-date, healthcare is the best-performing sector in the S&P 500, rising about 7%, more than double the S&P 500’s gain of about 3%.
