Health care sector
Unloved but well positioned, this innovative sector may offer long-term drivers and low valuations.
- Health care stocks underperformed in 2024 as investors favored high-growth tech stocks over more defensive sectors.
- After a period of lagging the broad market, valuations across the sector have recently come down to attractive levels, creating some interesting potential opportunities.
- At the same time, some of the temporary headwinds that contributed to recent underperformance could be set to abate in 2025.
- There may be compelling potential in the innovative parts of the sector where new drug candidates move through clinical trials, new breakthrough drugs are launched, and medical innovations elsewhere in the sector take hold.
Health care stocks had a bumpy year in 2024. The sector was outshined by high-growth megatrends like artificial intelligence (AI). Fundamental challenges and policy uncertainties also posed headwinds for certain health care segments. Some of these policy headwinds may abate with the upcoming change in administration, while others, like drug pricing, may persist.
Regardless, the future looks potentially bright for health care stocks, many of which have been prolifically innovating in recent years as investors’ attention has been focused elsewhere. And the upside to multiple years of sluggish performance is that valuations across the sector have recently looked quite attractive, offering a potential entry point to a sector with profound long-term drivers.
2024: Coming off a challenging year
In the first half of 2024, health care stocks took a backseat to sectors like technology and communication services, where investors flocked to stocks that offer a potential play on the future of AI. Although returns for health care stocks began to improve in the second half of the year as the market rally broadened, some health care segments struggled as the sector continued to work through supply-and-demand imbalances left over from the pandemic.
Specifically, Americans have still been catching up on surgeries and treatments that they delayed during the pandemic—and so sought services in hospitals, doctor offices, and ambulatory care centers in increased numbers. While this increase in utilization was a benefit for some parts of the sector, like health care facilities and medical device makers, it weighed heavily on the stocks of managed-care health insurers. Also, life sciences tools and services companies, the segment of the sector that focuses on testing and analysis, saw declining demand as people used fewer COVID tests and continued to work down pandemic-related inventory buildups.
Policy posed another headwind. Health insurers that administer Medicare Advantage policies, a type of Medicare health plan offered by a private company that contracts with Medicare, were hit by inadequate reimbursement rates (i.e., the payments the federal government makes to these insurers). And policy uncertainty inherent in an election year likely weighed on the sector as a whole.
On the upside, innovation continued at a strong pace. Biotech companies made a series of positive clinical announcements. And excitement around new obesity and diabetes treatments helped bolster pharmaceutical firms’ market capitalization.
Past performance is no guarantee of future results. Health care sector performance is represented by the S&P Health Care Select Sector index. Data as of December 9, 2024. Source: S&P Dow Jones Indices, a division of S&P Global.
2025: Innovation and improvement lead the way
For 2025 and beyond, I believe many health care industries may be well positioned.
Some headwinds that held the stocks back in the past year may be poised to fade. For example, the unexpected acceleration in utilization is likely to eventually reverse. Any indication that we’ve reached the peak of utilization could be positive for the performance of managed-care providers. And the conclusion of election season should dampen policy fears surrounding the sector. The incoming administration could favor policies that are more advantageous for the sector—particularly for managed care companies—such as allowing for greater flexibility over Medicare Advantage policy prices and risk coding and by potentially pausing or even reversing some of the previous administration’s policies.
Moreover, I’ve been seeing a lot of green shoots in terms of novel, viable drug candidates in biotechnology, which gives me optimism about the growth prospects for this innovative sector.
Potential value in specialty drugmakers
Anti-obesity drugs may have taken center stage in recent years, but recent dramatic breakthroughs in the biotechnology industry could be game changers in the coming years. Overall, biotech firms have been supported by a decrease in the cost of genome sequencing, the expansion of cell-based therapies, and an accelerated pace of drug discovery. Just this year, biotech firms have been reporting encouraging clinical data in blockbuster categories that could move the needle for industry sales. In particular, so-called specialty drugs, which typically are new drug categories that start at higher price points, have recently seen sales expanding by 15% to 17% a year.
A potential entry point
While health care lagged in 2024, low current valuations could provide an opportunity for investors who want exposure to a sector with strong long-term drivers—chief among them an aging U.S. population increasingly in need of medical care.
The sector also sports improving business fundamentals, like cash flows, and a vast and diverse number of industries with a combination of defensive and growth characteristics that may be attractive in a variety of scenarios.
Explore the 11 equity sector outlooks
Diversification does not ensure a profit or guarantee against loss.
It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to represent that of any Fidelity mutual fund. The S&P 500® index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. The S&P 500 Health Care Sector index comprises those companies included in the S&P 500 that are classified as members of the health care sector.
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here. Investing involves risk, including risk of loss.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. The health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations. Sector investing is also subject to the additional risks associated with its particular industry.