Healthcare: four drivers for healing the sector

Defensive strength in weak macro environments and rate cutting cycles
History reinforces healthcare’s role as a defensive allocation. Since 1990, the sector has outperformed in every US recession, delivering a mean 10 percentage points of excess return versus the S&P 500 (see table). Healthcare and particularly biotech have also tended to outperform during Fed cutting cycles. As we enter an increasingly uncertain period, we expect to see strong flows to the value parts of healthcare as hedges to growth exposure in tech.

Healing mega caps and an attractive valuation provide the bottom-up support for a rally
Alongside the macro and political headwinds, key bellwethers within the sector have had stock-specific issues (e.g. UnitedHealth, Novo Nordisk, Eli Lilly). With improving news flow and more compelling valuations, these have started to recover. Healthcare equities account for <9% of the S&P 500 despite ~18% of US GDP. The sector is trading at a forward earnings multiple near a 10-year low discount relative to broader equities. Pharmaceuticals particularly are already priced for meaningful near-term drug price reform driven EPS downgrades, suggesting ample room for a re-rating once uncertainty clears.

Stepping towards a little more policy certainty or desensitization
A key overhang has been the US administration’s most-favored-nation (MFN) drug pricing order. President Trump’s August 1 letter set a September 29 deadline for binding commitments, creating a near-term catalyst. Industry has already shown adaptation through direct-pay obesity models and selective European price moves, though full developed-market equalization is unrealistic. Ultimately, Trump seeks a “deal moment” and visible win. With reshoring progress already achieved, a compromise is more likely – potentially via a pilot MFN study or limited application in Medicaid. Such measures would require industry cooperation to deliver results before the mid-term elections. Given complexity, MFN may just be unworkable, but alternative price concessions could still give the administration a win. While multiple scenarios exist, management commentary suggests a deal is likely; absent broad MFN, any compromise could serve as a clearing event and ease investor concerns. In a separate Washington development, ACA subsidy extension is now central to Democrats’ budget negotiations; resolution would support medtech and hospital stocks. Taking a step back, healthcare reforms under Clinton, Bush, and Obama all triggered strong post-uncertainty re-ratings.

Innovation should enable investments in care elsewhere
Through the political noise, innovation has continued. The use of AI and robotics in healthcare should improve productivity and outcomes for patients. Longer-term, secular growth is anchored by an aging population, rising global demand, and breakthroughs across disease areas. In the present, GLP-1s like semaglutide are reshaping metabolic care, cutting cardiovascular, kidney, and liver disease rates while potentially saving billions. With many patients paying out-of-pocket, the burden on governments is reduced even as health systems benefit. Over time, the savings could be substantial, allowing for improved care in other disease areas. NICE and ICER have already found them cost-effective, not counting wider societal gains. In the near-term, the Evoke trial investigating semaglutide in Alzheimer’s disease could further broaden adoption by creating an “hallo effect” across the class.

Healthcare excess return during recessions (S&P 500 vs S&P 500 healthcare)

Source: Bloomberg/Bellevue Asset Management