Everyone Hates Healthcare Stocks. That’s Reason Enough to Take a Look.
Donald Trump’s nomination of Robert F. Kennedy Jr. and other healthcare skeptics has caused investors to flee the sector—which means it’s time to pay close attention to the stocks.
The reaction to Trump’s election has been generally celebratory, with the S&P 500 up nearly 5% in November alone. Not healthcare stocks—the Health Care Select Sector SPDR exchange-traded fund (ticker: XLV) has fallen about 2% this month.
Those moves accurately affect where investors have been putting their money. According to BofA Securities’ latest fund flow data report released on Tuesday, its clients were net buyers of equities the previous week for the third week in a row, with inflows accelerating to their highest level since September. However, healthcare ETFs were the only sector ETFs that BofA’s clients were avoiding. Among individual companies, healthcare stocks saw their first outflows in five weeks, one of only two sectors, along with real estate, to experience net selling.
It’s easy to understand why investors are so jittery: The incoming Trump administration could make plenty of waves with changes in policy and various potential appointees, including Dave Weldon to lead the Centers for Disease Control and Prevention and the aforementioned RFK Jr. as secretary of Health and Human Services, could be wild cards given their rejection of some scientifically accepted facts. Their previously disclosed stances have investors worried about the near-term future of everything from vaccines to formerly highflying weight-loss drugs. And given Wall Street’s aversion to uncertainty, they may remain out of favor in the near term until there’s more clarity.
But sometimes the reward more than makes up for the risks, and healthcare stocks are trading cheaply enough to start looking interesting. The Health Care ETF trades at 17.8 times earnings, down from 19.9 times at the end of August and near its cheapest level of the year.
That valuation would be particularly appealing if regulatory actions proved less onerous than the recent concerns. Guggenheim analyst Debjit Chattopadhyay notes that his industry contacts have expressed some skepticism “on the scope of both broader agency and potential drug development changes given the relatively limited time frame ahead of midterm elections in 2026, the broader goals of the Trump agenda, and the uncertainty that remains around Trump and congressional support and mind share for sweeping changes.”
He also notes that changes around vaccines specifically could be an “uphill battle,” with the Health and Human Services chief still having to work within existing infrastructure “and state authority as guardrails against his actions.”
Nor is there anything wrong with the sector’s fundamentals. Revenue for healthcare stocks is expected to climb by 11% in the year ahead, according to Trivariate Research founder Adam Parker, the best performance of any sector save technology, while gross margins of 54% are in the historical 93rd percentile. That seems like a disconnect despite the ongoing uncertainty, especially as most other sectors are more expensive based on their historical averages.
Moreover, many investors are betting that merger and acquisition activity will pick up under the new administration. That’s caused shares of potential takeover candidates to rise, Parker explains, adding that about 5.5% of the 1,000 largest healthcare stocks by market cap typically receive a tender offer every year. “It is incongruous to bid up stocks levered to increased M&A as we have seen since the Red Sweep—and not conclude that the valuations of select healthcare stocks will also begin to expand,” he writes.
Ultimately, much of what healthcare policy will look like in 2025 and beyond is still debatable, but a growing sector that is trading cheaply shouldn’t be treated as DOA.