Health care sector

Eddie Yoon is a portfolio manager of Fidelity Advisor^® Health Care Fund.

Health care stocks climbed higher in 2025, roughly in line with the broader U.S. equity market. Enthusiasm over all things tied to artificial intelligence (AI) fueled gains in areas of the market with clearer AI exposure, and some sector-specific volatility provided headwinds, while other parts of the sector saw the beginning of a reemergence, following years of underperformance. U.S. government policy uncertainty, rising health care costs and weak quarterly financial reports from some industry leaders weighed heavily on the sector. A pick-up in mergers and acquisitions (M&A) and capital markets activity, in conjunction with more favorable monetary policy, provided some tailwinds to the sector, most notably in the biotech industry, though we saw notable Initial Public Offering (IPO) activity in other areas in the sector as well, including in the medical technology industry.

Investors continue to value innovation in the health care space. Even amid macroeconomic uncertainty, investors are rewarding companies with breakthrough clinical results and large companies are putting capital to work through acquisitions. Incremental progress is also emerging in areas such as bioprocessing—a trend I see likely to build in 2026.

Year-to-date price return

2025: Policy uncertainty amid strong clinical trial data

Unclear U.S. government policy direction clouded the health care sector’s outlook in 2025. Health insurers were hit particularly hard as the trend of costs outpacing pricing that we’ve seen over the past few years continued, leading to significant profit margin pressure in the industry. Toward the end of the year, additional volatility hit the sector, as investors considered the fate of the enhanced premium for Affordable Care Act marketplace plans. The subsidies, first introduced under the American Rescue Plan Act of 2021 and later extended through 2025 in the Inflation Reduction Act of 2022, reduced consumer premiums. However, without another extension, enrollees could face sharply higher premiums in 2026.

In addition to rising costs, tariff and trade concerns and the Trump administration’s targeted cuts to National Institutes of Health (NIH) research funding also proved to be headwinds for some industries. The Supreme Court allowed the administration to end funding to some areas, even as Congress preserved the NIH’s $48 billion budget. The White House’s new upfront policy could reduce the number of projects funded. Finally, drug pricing was back in the news in May, when the president pushed to tie U.S. prices to those of other countries that follow the World Trade Organization's "Most Favored Nation (MFN)" rule.

M&A volume (# of deals)

Amid the uncertainty, there were some bright spots in the sector. Biotech stocks, up about 36% year to date through November 30, 2025, according to the MSCI IMI Biotechnology 25/50 Index, benefited from strong clinical data for multiple drug candidates and a policy interest rate cut by the Federal Reserve that eased funding conditions. The biotech industry and health care technology industry both benefitted from increased capital market activity, with M&A and IPO activity picking up toward the second half of the year. Meanwhile, site-of-care shifts—from hospitals to ambulatory and urgent care centers—benefited some health care facilities.

2026: Innovation and progress lead the way

Despite the macro uncertainties, innovation remains a key market driver for the sector in 2026 and beyond. In the biotech industry, we’re seeing higher rates of positive clinical data—with clinical trial success rates jumping during the year. I believe this is because many of the more speculative companies have been weeded out of the industry. Positive clinical data has been rewarded with a corresponding increase in valuations during the year. In a sign of a return to more level heads in the space, companies with negative data aren’t being funded and some are continuing to go out of business. I believe this rightsizing continues to be positive for the industry. In addition, we’ve seen more companies pursuing M&A this year, a trend I expect to continue, as large cap biopharma companies look to fill therapeutic pipelines in the face of significant patent cliffs expected between now and 2030.

Conviction in bioprocessing and biotech stocks

Bioprocessing companies manufacture the tools—bioreactors, fuel bags and cell-culture media, for example—needed to make complex drugs, including monoclonal antibodies, cell and gene therapies, as well as vaccines. Demand surged during the pandemic for these tools, which are critical components in the creation of vaccines, treatments, and diagnostics, and as the biotech industry swelled in size. But this boom led to a bust in subsequent years when sales fell as biopharma firms worked through outsized inventory, and cut their spending when funding was sapped by rising interest rates and a drying up of capital markets to the industry.

Recently, though, we’ve seen early signs of a recovery for bioprocessing companies, as companies have worked through inventories, and the beginnings of a recovery in the biopharma space. The bioprocessing industry has seen an uptick in orders that I expect will continue through 2026. Bioprocessing firms also stand to benefit from increased capital spending, nearshoring trends and policies like the MFN rule. Among the largest holdings in this industry are Danaher and Repligen—two companies I favor for their stable business models, exposure to secular growth trends and regulatory barriers that limit new competitors.

Biotech is another industry regaining momentum after a challenging period. In recent years, the group was hurt by high interest rates, regulatory and policy unease, and the poor performance of speculative companies that went public during the pandemic. But with several crucial data readouts expected into 2026, key breakthroughs are a real possibility.

Over the years, research and development in the highly personalized gene therapy space has surged, while the cost of gene sequencing has dropped. Moreover, merger and acquisition activity is poised for a comeback, with blockbuster drugs set to lose exclusivity at a faster-than-average pace over the next five years and major players looking to strike deals to refill their pipelines. In my view, specialty firms Argenx and Alnylam Pharmaceuticals appear particularly well positioned, as both companies are turning profitable on the back of successful commercial drug launches. In addition, these firms leverage innovative antibody and RNAi platforms to address significant unmet medical needs. RNAi is a biological process where RNA molecules are used to silence specific genes. For therapeutic purposes, this process can target and treat diseases by silencing the genes responsible for them. Each is among the fund’s largest holdings as of November 30.

A potential opening for long-term investors

Across the sector, lower stock valuations and a period of multiyear underperformance relative to the broader U.S. equity market may offer an appealing entry point for investors seeking exposure to powerful long-term trends—most notably an aging U.S. population with unmet medical needs.

The sector also encompasses a broad and diverse range of industries, offering a unique mix of defense and growth characteristics that may be attractive across a variety of market scenarios.