Looking Through the Noise: Opportunities in Health Care
Following a volatile year for health care stocks in 2025, the sector’s long-term fundamentals remain solid. Despite short-term turbulence, structural growth drivers and innovation continue to support attractive opportunities across the industry.
The Span of the Health Care Universe
Health care currently accounts for roughly 10% of the S&P 500 Index and can be divided into several distinct subsectors:
Managed care and health insurers (~10% of the sector) focus on organizing and financing care for large populations.
Health care services (~10%) include hospitals, laboratories, outpatient facilities and distributors that keep the system running day to day.
Medical devices (~20%) range from hospital equipment and surgical tools to consumer wearables.
Life science tools and diagnostics (~10%) supply the instruments, reagents and technologies used in research and development.
Biopharmaceuticals make up the remaining ~50%, covering companies that discover, develop and commercialize medicines.
These segments are closely linked. Roughly 60% of the sector, biopharma plus life science tools, depends heavily on the pace of pharmaceutical research, clinical trials and new drug approvals.
2025: A Year of Volatility
Health care benefits from powerful long-term tailwinds but it is not immune to periodic setbacks. The post-pandemic period brought a sharp boom-and-bust in COVID-related spending, slower biopharma budgets, shifting government policies and margin pressures in insurance. These factors made the traditionally stable sector feel unusually cyclical in 2025.
Early in the year, investors rotated into health care seeking defensiveness and more reasonable valuations amid broader market uncertainty. Mid-year brought new challenges: tariff announcements and renewed drug pricing debates triggered sharp declines in biopharma and life science tools, while managed care stocks faced underwriting pressures and higher utilization rates. Late in the year, as some policy concerns eased, biopharma and related segments rebounded strongly.
For the full year, health care returned approximately 12.5%, modestly lagging the S&P 500’s 16.4%. The volatility, however, has left many stocks at more attractive valuation levels heading into 2026.
Long-Term Growth Drivers
Several structural forces continue to favor the sector:
Aging populations worldwide are driving faster growth in health care spending relative to overall GDP. In the US, much of this spending flows through insurance systems, requiring efficient cost management by payers.
Innovation across drug development, devices, and services is accelerating, supported by advances in artificial intelligence. AI is helping improve drug discovery success rates, enhance diagnostics, standardize clinical decisions and boost operational efficiency in a labor-intensive industry.
Only about 20% of known diseases currently have approved treatments, leaving substantial room for new therapies.
These trends support both higher overall spending and the potential for improved clinical outcomes at lower long-term costs.
Defensive Qualities and Key Risks
Health care spending tends to be non-discretionary, patients still need medications, procedures and care even during economic slowdowns. This provides a degree of resilience. However, risks remain:
Patent expirations will require biopharma companies to replenish pipelines through R&D or strategic deals.
The success of GLP-1 weight-loss drugs has raised questions about potential demand shifts in related areas such as diabetes care and bariatric procedures, though history shows that major therapeutic breakthroughs (e.g., statins) have ultimately expanded rather than contracted overall health care utilization.
Increased competition from innovative drugs developed in China is a growing factor. Rather than viewing this solely as a threat, many global companies are exploring partnerships to combine strengths and accelerate patient access to better treatments.
A Disciplined Investment Approach
While macro and thematic trends shape the opportunity set, stock selection remains the primary driver of returns. The sector functions as a highly interconnected ecosystem where developments in one area can quickly affect others. Research therefore combines detailed company analysis with a broad understanding of health care systems, using both public data and primary sources.
No detail is overlooked. For example, specialized topics such as regulatory risks around sterilization methods (like ethylene oxide used for half of all US medical devices) are examined not only for current impact but also for potential future costs, innovation responses and litigation exposure.
The team works collaboratively, regularly challenging assumptions across subsectors to build a well-rounded view and identify companies best positioned for long-term success.
An Attractive Outlook
Health care combines defensive characteristics with meaningful growth potential driven by demographics, innovation and efficiency gains. After the volatility of 2025, many companies in the sector now trade at historically reasonable valuations.
As long-term investors, we remain optimistic. The sector’s structural tailwinds and ongoing progress in addressing major unmet medical needs suggest that current noise may be creating opportunities for those willing to look beyond short-term headlines.
Important notes :
This article is for informational purposes only and does not constitute investment advice. The value of investments can fall as well as rise, and you may get back less than you originally invested. Past performance is not a reliable guide to future performance.