Key takeaways

  • As the third largest industry represented in the S&P 500 Index, healthcare stocks play an important role in the portfolios of many investors today.

  • After a solid 2024 start, healthcare stocks struggled at year’s end.

  • There’s a significant disparity between “winners” and “losers” among healthcare stocks, which creates opportunities and risks investors should consider.

While healthcare stocks have modestly underperformed the broader U.S. equity market in recent years, the performance disparity was far more pronounced in 2024. By mid-December on a year-to-date basis, the S&P 500 Health Care index is up just 5.29%. That significantly lags the broader S&P 500's 28.54% year-to-date gains.1

Through mid-September, the Health Care sector returned 16.3%, only modestly underperforming the broader S&P 500 index. “The market, at that point had broadened out, and strong performance extended beyond the technology-oriented stocks that previously dominated the market,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. However, from Sep. 16, 2024, to December 12, 2024, healthcare stocks included in the S&P 500 dropped nearly 10%.

“The sector should be positioned to benefit in the long run from an aging population, which requires more healthcare spending,” says Haworth. “However, at least in the short term, that hasn’t been working.” One factor coming into play recently is Donald Trump's election to the presidency for a second term. Trump named Robert F. Kennedy, Jr., a critic of traditional healthcare services, including pharmaceutical companies, to be his administration’s head of the Department of Health and Human Services. The potential impact of this appointment on the healthcare industry adds a degree of near-term market uncertainty.

 

Widely-dispersed performance

Wide stock performance dispersion is a healthcare sector characteristic. “If you look closer, there’s a significant differentiation of performance between winners and losers within the industry,” says Haworth. For example, Eli Lilly & Co. stock enjoyed dominating performance dating back to 2022, as the popularity of its drugs aimed at treating diabetes and obesity proved extremely profitable. By contrast, Pfizer’s stock soared beginning in late 2020 and through 2021 on the strength of its leadership role in delivering COVID-19 vaccines. However, the company’s stock has struggled more recently as it awaits its next big breakthrough. Pfizer’s stock, long a staple of the health care sector’s ten largest stocks, has now dropped out of the top ten.

Chart depicts pharmaceutical stock performance 12/31/2022 - 12/12/2024.
Percent change of stock price from Dec. 31, 2022 to December 12, 2024.

This varied performance even within the pharmaceutical category of the healthcare sector demonstrates that it is far from a monolith. It’s common to see wide gaps between winning and losing stocks.

 

Healthcare’s role in the economy

Over the past 50 years, healthcare has become a more notable component of the U.S. economy. Significant expenditure growth occurred between 1960 and 2005. The growth in expenditures as a percent of the nation’s economy (measured by Gross Domestic Product or GDP) moderated since 2005, except for a spike in costs in 2020, the year that COVID-19 emerged. Costs, as a share of the economy, are projected to moderate into 2025, but grow again by the end of the decade.2 The rise in healthcare spending is attributable at least in part to the aging of America’s population

Chart showing health expenditures as a percent of GDP.
Source: Centers for Medicare and Medicaid Services, “National Health Expenditures; Aggregate and Per Capita Amounts,” 2023. *Projected expenditure as a percent of GDP in 2025 and 2030.

Role of healthcare stocks in the broader market

Healthcare represents the third largest sector in the large-cap S&P 500 Index, behind information technology and financials.1 It is the fifth-largest sector in the Russell MidCap Index (an index of about 800 stocks). Within the small-cap Russell 2000 Index, healthcare is the third largest sector, trailing only industrials and financials.3

Chart showing healthcare stocks as a percentage of key stock indices such as S&P 500, Russell MidCap, and Russell 2000.
Source: S&P Dow Jones Indices; FTSE Russell. As of Nov. 30, 2024.

After experiencing a slowdown in first quarter earnings growth compared to a year earlier, S&P 500 healthcare sector earnings appeared to be on pace for a 19% increase for third quarter 2024 compared to 2023’s third quarter. The sector typically is the third largest contributor to S&P 500 earnings.1

“An understanding of the underlying opportunities in the sector and an active management approach can play an important role in achieving success with healthcare investments,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management.

From 2014 to 2022, the healthcare sector tracked closely with the broader market. Since that time, as technology stocks soared, healthcare stocks lagged, and so for the 10 years dating back to 2014, healthcare stocks averaged somewhat less than the S&P 500 index.2

Chart depicts the hypothetical growth of a $100,000 investment in the S&P 500 versus the healthcare sector: 2014-2024.
$100,000 initial investment, with growth calculated based on annual returns (and year-to-date returns in 2024) of the S&P 500 and the S&P 500 Health Care index. No fees or taxes are assumed. This is only a hypothetical example. Past performance does not guarantee future results. It is not possible to invest directly in the S&P 500 Index or the S&P Health Care Index. As of August 31, 2024.

“Investors can gain exposure to the healthcare sector by owning the S&P 500 through a passively managed index fund or ETF,” says Haworth. “Investors may also want to take a more selective approach, as the record demonstrates there can be varied performance within the healthcare sector.”

 

Healthcare investing

Healthcare plays a critical role in our day-to-day lives. “Everything from weight loss to extending our lives remain very important to people,” says Haworth. Publicly traded companies that address the demand for healthcare products and services offer intriguing investment potential. Medical advancements not only enhance our quality of life, but also create potential to generate new revenue and profits for innovative companies that deliver those products.

Nevertheless, the disparate fortunes of healthcare companies, which can change significantly over time, create some challenges for investors. “There are clear opportunities in more active management of healthcare investments given the push-pull dynamic of demand relative to the winners-and-losers system in the pharmaceuticals field,” says Haworth. “For others, relying on a passive management approach, an S&P 500 Index fund or ETF, may be the best way to access the investment potential of the healthcare sector.”

As you explore such investment opportunities, be sure to discuss it with your financial professional. You’ll want to consider how healthcare investments can work within the context of your overall financial plan and investment strategy.

Frequently asked questions

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Disclosures

  1. S&P Dow Jones Indices.

  2. Centers for Medicare and Medicaid Services, “National Health Expenditures; Aggregate and Per Capita Amounts,” 2023.

  3. FTSE Russell.

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