Health Care Stocks on the Mend: Signs of a Promising Turnaround

Imagine the stock market as a waiting room. In one chair sits artificial intelligence stocks — like a robust, energetic patient who’s eager to get moving but needs to avoid burnout. In the next chair are health care stocks — like a patient recovering from an illness, regaining strength and showing promising signs of a strong recovery with the right support.

Throughout much of 2025, health care stocks experienced limited growth due to regulatory uncertainty, tariffs and other factors. However, we believe that many of the challenges facing health care in 2025 are exaggerated, unlikely to materialize or have already been reflected in current stock prices.

Indeed, health care stocks began to show signs of improvement in early August, as shown in Figure 1. We also think certain pockets of the health care sector have strong fundamentals that could offer the benefit of diversification if the market starts to broaden.

Understanding the Challenges Facing Health Care Stocks

A key reason health care stocks have struggled in 2025 is the market environment, which has benefited higher-risk and expensive sectors like technology and challenged the less volatile nature of many health care stocks. However, we believe this environment may be shifting, opening doors for health care to regain its footing.

Challenges faced by specific sectors, along with the risk of tariffs, have negatively impacted the performance of some health care stocks. Investors should also keep in mind that policy developments and regulatory changes are often temporary; while they may influence short-term sentiment, they rarely affect the long-term fundamentals of companies.

Managed care companies, which administer private health insurance plans and government programs like Medicare and Medicaid, have posted terrible earnings, dragging down the broader health care sector. Much of this stems from a cycle of mispricing their premiums. Still, as these companies adjust, we expect improved pricing strategies to help restore their profitability.

Pharmaceutical companies have been under pressure from various sources. Early in the year, Robert F. Kennedy Jr.’s appointment as the secretary of the Department of Health and Human Services affected their stocks. Kennedy has openly expressed his desire to lower drug prices and his concerns that some pharmaceutical products may be harmful.

Tariff announcements, one as high as 250%, have also pressured pharmaceutical stocks. Like Trump’s other proposed tariffs, the one targeting pharmaceuticals was fluid. Under the U.S. framework trade agreement with the EU, tariff rates on pharmaceuticals were capped at 15%, significantly lower than the original proposal.

Along similar lines, investors believed that tariffs would significantly impact medical device companies.

Becton Dickinson, which makes various medical devices, saw shares fall on the initial U.S. tariff announcement in April. But the company’s stock price has improved, thanks to improving volumes, rerouted supply chains and subsequently lower tariff rates, which have mitigated the anticipated effect of Trump’s trade policies.

Similarly, medical device maker Zimmer Biomet has absorbed tariffs with various mitigation strategies and benefited from steady performance in its end markets. These examples highlight the sector’s ability to adapt, with companies leveraging innovation and operational adjustments to weather challenges and position for growth.

Strong Corners of the Health Care Sector

Other health care industries have persisted through what’s been an otherwise tough year for the sector. Their resilience demonstrates the diversity within health care, and we think select opportunities remain compelling for forward-looking investors.

Contract research organizations (CROs), which manage data and clinical trials for drugmakers, have seen improvement after a rough first half of 2025.

CROs have reported an uptick in activity from biopharma and smaller biotechnology companies that delayed projects earlier in the year. Iqvia Holdings started to rebound after seeing growth from small biotechnology companies. Tariff uncertainty remains a concern for companies like Iqvia, but the second half of 2025 is expected to be better than the first half.

Similarly, clinical laboratories have seen gains in demand and volumes. For example, Quest Diagnostics, has grown organic volumes and reported stronger utilization trends.

Dental products companies, which have faced hurdles with utilization trends and interest rates, are also seeing a bounce. Envista Holdings, a holding company of several dental brands, raised its earnings guidance by 10% in July after reporting strong demand in various end markets.

The continued progress in these subsectors underlines how adaptability and focused execution can help companies overcome adversity, making them potentially well-positioned for further gains as sector headwinds abate.

Good News for Health Care Stocks: They’re Inexpensive

Health care’s challenges have led to low valuations, as many growth investors have exited in favor of the booming fortunes of other sectors like technology. See Figure 2.

However, as value investors, we believe health care’s low prices position the sector for a potential turnaround, regardless of whether the bull market continues or dissipates.