- Over the last five years the broad US stock market has doubled1, compared to the IA Healthcare Index rising a meagre 10%2.
- The various acronym-based headwinds facing the sector, including DOGE, RFK and MFN have started to fade.
- Since the nadir for the sector in April 2025, the IA Healthcare index has returned 20%3.
The healthcare sector is the focus of this week’s insight. It makes up 9% of the S&P 5004, which is nearly $6tn of total company valuations, or an even larger 12% of the FTSE 100 which equates to £283bn of total value5. Whilst being economically important, the sector is also personally important for all of us as we will no doubt electively and un-electively use healthcare services in our lives. Putting ethics aside, the evidence denotes that when a company provides something which consumers cannot avoid using, pricing power is normally strong, and corporate profits tend to remain buoyant and insulated from the wider economy.
A Favourable Prognosis
One might argue that the healthcare sector has some of the most favourable structural drivers. Figure 16 shows the ageing population trajectory for a selection of large economies. The key takeaway is that populations are getting older – and as your age increases, you tend to need to spend more on healthcare.
Figure 1
Furthermore, there is a growing backlog of patients waiting for treatment after the Covid pandemic delayed procedures – Figure 27. The backlog has more than doubled since 2019, meaning a lot more treatment and spending is going to take place.
Figure 2
Finally, interest rates are falling, which particularly benefits smaller companies in the healthcare sector, such as biotechnology firms, which are more reliant on external capital to fund their operations.
However, despite this healthy backdrop, over the last five years the broad US stock market has doubled8, compared to the IA Healthcare Index rising a meagre 10%9.
Pre-existing Conditions
Several issues have been weighing on the healthcare sectors valuations, and these all derive from the election of Donald Trump in 2024.
The first issue was the inception of the Department for Government Efficiency (DOGE) in January which slashed spending, particularly targeting workforce reductions in key healthcare agencies. Quite publicly, however, Musk exited the scene, and the DOGE cuts are being unwound with many positions being refilled at the government agencies, particularly the Food and Drug Administration (FDA).
Robert F. Kennedy Jr. (United States secretary of health and human services) is another issue weighing on healthcare. However, his particularly stringent views do not extend much further than vaccines and diets, aiming, in his words, to “Make America Healthy Again”.
The application of Trump’s tariffs has been another headwind. Trump’s aim is the building of US manufacturing capacity. The specifics of the tariffs have gradually been released, and the reaction within the healthcare sector was moderately positive. The key takeaway is that if a spade is in the ground for a US pharmaceutical factory, then tariffs are entirely avoided.
Most Favoured Nation (MFN) pricing is the last remaining key concern. US consumers do pay more than non-US consumers, and so a levelling out to some extent is natural. We have seen some deals filter through, for example Pfizer and AstraZeneca have come to agreements, and we think gradually the risk will fade away.
The sector appears to be at the beginning stages of a re-rating since some of these issues are reaching resolution. The low point for the sector was 15th April 2025, when sector valuations were at historically low discounts to the wider market. Since this point the IA Healthcare index has returned 20%10.
Bowmore Portfolios
We allocate specifically to the healthcare theme within our core portfolios, sitting within our global thematic sub-category. We invest in the Polar Capital Healthcare Opportunities fund. The fund has consistently outperformed the wider sector; recently its under-allocation to US and large-cap pharmaceuticals on MFN concerns has helped performance. The fund has a larger-than-benchmark weighting to biotechnology which has rallied recently as financial conditions continue to ease.
The fund has delivered a return of 38% since the April low11, reinforcing our rationale for holding the fund. Furthermore, if the AI investment bubble deflates, healthcare should be an insulating place to hold capital given its defensive characteristics.
Source: Alpha Terminal, data as at 20/11/2025
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.
Sources:
1S&P 500® | S&P Dow Jones Indices
2Statistics by sector | The Investment Association
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4 S&P 500® | S&P Dow Jones Indices
5FTSE Russell
7Polar Capital
8S&P 500® | S&P Dow Jones Indices
9Statistics by sector | The Investment Association
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