The healthcare sector remains widely supported by broader secular trends, such as an ageing population and unmet healthcare needs, as well as continued innovation.
Despite these tailwinds, 2024 was a challenging year for healthcare stocks, but going into 2025, growing market volatility is restoring confidence and drawing attention back to this sector.
This suggests that some of the headwinds that weighed on the sector in 2024 may abate this year. Moreover, valuations are now at attractive levels, providing opportunities and setting a positive stage for the sector in 2025.
Valuations
VanEck’s portfolio manager, Cameron McCormack, has noted a shift among investors over the last six months towards more defensive stocks.
“With many asset classes appearing expensive, healthcare stocks stand out as one of the few that still offer compelling value,” he told InvestorDaily.
He highlighted that the price-to-forward earnings ratio is near the historical average and at a 20 per cent discount compared to global equities.
“Market volatility may return, triggered by heightened geopolitical tensions or economic weakness, bringing defensive sectors like healthcare back into favour,” McCormack said.
Healthcare stocks experienced a period of weakness in the first six months of 2024, and even though returns began to improve in the second half of the year, some segments continued to struggle with post-pandemic supply and demand imbalances, according to Fidelity.
But Edward Yoon, Fidelity portfolio manager, said that regardless of last year’s performance, “the future looks potentially bright for healthcare stocks”.
“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,” Yoon said.
The impact of Trump’s administration
The return of Donald Trump to the White House is also expected to bring “much-needed clarity” after a period of political uncertainty, providing further boost to market confidence.
McCormack highlighted that one of the potentially positive outcomes of the new administration could be “increased flexibility” over drug pricing.
“This regulatory shift could significantly benefit pharmaceutical companies, particularly industry giants like Eli Lilly, Johnson & Johnson, and Merck & Co Inc,” he said.
“By allowing these companies more leeway in setting drug prices, they may be able to enhance their revenue streams and invest further in research and development.”
Similarly, Fidelity’s portfolio manager also noted that the conclusion of the election season should alleviate fears, especially given the new administration is expected to favour more advantageous policies for the sector.
Overall, McCormack believes that 2025 could be “a promising year” for healthcare stocks.
“The risk of inflation and market shocks has increased in a more fractured geopolitical environment,” he said.
“Should economic conditions weaken, healthcare stocks could firmly be back in favour, especially since their valuations are more attractive on a relative basis to the market.
“Additionally, policy uncertainty may stabilise, providing a clearer path for healthcare companies and potentially reducing some of the operational challenges they faced in 2024.”
Innovation
The healthcare sector has also been identified by American Century as one of the key areas for investment opportunities in the first quarter of 2025.
Keith Lee, co-chief investment officer, has emphasised that drug companies taking new approaches to treating diseases make this segment “a major secular driver of growth”.
“Robotic surgery and medical device companies are making massive strides in providing more effective tools and procedures, resulting in better outcomes and fewer patient complications. Other companies are evolving to meet the demand for more cost-effective, accessible care,” he added.
Yoon highlighted that although anti-obesity drugs have dominated recent discussions on innovation in the sector, recent “dramatic breakthroughs” in the biotechnology industry could become the “game changers”.
This growth has been driven by declining genome sequencing costs, the expansion of cell-based therapies and an accelerated pace of drug discovery, he added.
According to Fidelity, biotech firms have reported encouraging clinical data in blockbuster categories.
The data shows that so-called specialty drugs, which typically are new drug categories that start at higher price points, have expanded sales by between 15 per cent and 17 per cent a year.
