The Healthcare Sector Was Supposed To Count 2025 As Its Comeback Year: It’s Still Waiting for Its Golden Age To Arrive

In December, we wrote about how healthcare could make 2025 its comeback year, betting that a change in US politics could free the industry from scrutiny and red tape. Six months later, their golden age has yet to arrive.

The early sparks of a recovery fizzled in February when the industry was seen as a “standout” because of its desirable valuation. But since April’s tariff tumble, healthcare has gone from a comeback prospect to the second-worst-performing sector in the S&P 500.

But not all hope is lost.

Blame game: Facing huge cuts to federal science funding, tariffs on pharmaceuticals, and reductions to Medicaid and Medicare, the healthcare space might long for the days when its biggest concern was Democrats imposing price negotiations on drugs. Its sector ETF likely does, at least. It remains one of just two S&P sectors in the red on the year, with theXLV

down 2.33% YTD, even in the face of an S&P 500 at all-time highs. Despite the decline and a dearth of good news, analysts remain bullish.

• Just as they did in December, analysts polled by FactSet expect the healthcare sector to be the best performer in the S&P 500 over the next 12 months.
• They see it returning 15.9% (vs. 7.9% for the S&P 500 at large), flying in the face of pessimism from the passing of the “One Big, Beautiful Bill” and other recent policies.

Buyer Beware

Analysts could be overly hopeful about the timing — or specifics — of a healthcare rebound. With just 22 of its 60 holdings outperforming the S&P 500 year-to-date, a shakeup may be needed for it to return to parity with the broader index. That might not come quickly, but here, it helps to zoom out.

• The healthcare sector remains the most “discounted” in the S&P 500 — especially when considering its one-year P/E is 16.7x, reflecting market skepticism despite analysts’ high hopes for earnings growth.
• According to analysts, pharmaceutical and biotech firms remain the leading source of that potential, which could help make up for the slack created by struggling insurance companies.

No denying this: Political risks remain a dominant force in theXLV

(and the broader healthcare sector). Nonetheless, many of its strongest companies have adapted to trial by political fire before — even when the landscape changes with every election cycle. As a result, investors may find the risk-reward compelling, especially if they rotate out of some of the index’s ‘hotter’ pockets.