Investment opportunities and challenges in healthcare

Healthcare touches nearly every household, sitting at the center of the U.S. economy. It is a large, complex, and constantly evolving sector. The healthcare segment represents roughly 10 percent of the S&P 500’s overall value, ¹ which gives prospective investors many ways to gain exposure across different kinds of companies. ¹ Even so, recent years’ disappointing results mean the recent shift in performance has attracted fresh attention.

Over the past three years, the healthcare sector trailed the broader S&P 500, posting returns of 0.3% in 2023, 0.9% in 2024, and 12.5% in 2025. ¹ Year-to-date, healthcare returns are modestly above the S&P 500, which suggests momentum has improved. That gap between strong long-term need for care and weaker stock results leaves many people asking a simple question: What is changing, and where might opportunity be building now?

This report explains the forces shaping healthcare performance, the health conditions that drive spending across the system, and the themes that may matter most for interested investors. It also highlights that the sector can move in uneven steps, because success often depends on medical progress, public policy, and how well organizations manage rising costs. Investors can benefit from understanding both the promise and the pressure points before deciding how healthcare may fit into a broader plan.

Healthcare sector in transition: Strong demand meets real-world constraints

Healthcare demand keeps rising for clear, everyday reasons, including an aging population and the growing share of people living with long-lasting health conditions. Those forces support many parts of the healthcare system, from drug makers and device manufacturers to service providers and health technology. At the same time, the sector operates under ongoing oversight and frequent rule changes, which can reshape what companies can do, how they get paid, and how quickly they can adjust.

Costs continue to climb, and many organizations struggle with staffing shortages that make it harder to deliver care efficiently. Companies that provide health insurance and manage care aim to hold down the cost of treatment while improving quality. Well-known examples include United Healthcare Group, Elevance Health and Humana. Recent corporate updates around higher medical use and heightened public scrutiny of business practices have highlighted how quickly risks can surface, especially when government programs and complex business structures play a large role.

Technology is also reshaping what is possible, and it is doing so in ways that can influence both patient outcomes and business results. Artificial Intelligence (AI) plays a growing role in how organizations manage information, assist clinicians, and run operations more efficiently. Still, because healthcare is highly regulated, change may arrive more steadily than it does in faster-moving industries, and investors should expect progress to come in measured phases rather than overnight.

What are the medical conditions driving healthcare spending?

A relatively small set of widespread health conditions drives a meaningful share of healthcare spending, because these issues often require long-term monitoring and repeated treatment. According to the Center for Disease Control, the 10 most common health conditions in the U.S. include obesity, heart disease, diabetes, high blood pressure, kidney disease, chronic respiratory diseases, cancer, mental health disorders, arthritis, and Alzheimer’s disease. These conditions can reduce quality of life and shorten life expectancy, which is why prevention, better treatment, and new therapies remain a major focus across the system.

The data points behind these conditions also show why demand can stay durable over time. Over 40% of adults in the U.S. and 16% globally are considered candidates for some form of weight loss support according to reports from the Center for Disease Control ² and the World Health Organization, ³ while heart disease remains the leading cause of death in the U.S., ⁴ and cancer ranks second. ⁵ Diabetes affects over 11% of the U.S. population, ⁶ nearly half of U.S. adults have high blood pressure, ⁷ and mental health disorders affect millions of Americans annually, ⁸ underscoring how many people rely on ongoing care and medication.

For investors, that reality can translate into a steady pipeline of innovation as companies work to treat disease, reduce complications, and improve daily living. Some firms focus on medicines or therapies, while others build tools that help clinicians diagnose earlier, monitor patients more effectively, or tailor care to individual needs. That breadth is one reason healthcare can offer multiple paths to potential growth, even though outcomes can vary widely by company and by medical area.

Can AI help improve healthcare?

Better health outcomes often start with care that reflects the needs and preferences of each individual, and technology increasingly supports that approach. AI can help clinicians and researchers move faster by finding patterns in large sets of information, which may speed up discovery and improve decisions in day-to-day treatment. When technology reduces time spent on routine tasks, clinicians can often spend more time with patients, which supports the goal of more patient-centered care.

AI already supports a range of practical uses, including helping researchers identify promising paths for new medicines, assisting with diagnosis and treatment planning, and analyzing medical images such as X-rays, CT scans, and MRIs. It can also help monitor patients and send real-time alerts to care teams, which may reduce complications and improve follow-through. Just as important, AI can improve administrative efficiency through better data management, workflow automation, and smarter resource planning, all of which matter in a system where rising costs remain a central challenge.

Cost control is not only a policy issue; it can directly shape business performance and, by extension, investor experience. McKinsey Company estimates that for every $10 billion in revenue, AI could help health insurers save between $150 million and $300 million in administrative costs, and up to $970 million in medical costs. ⁹ Those potential savings help explain why many investors watch AI adoption closely, while also recognizing that healthcare organizations must implement changes carefully and within strict oversight.

What healthcare themes should investors watch?

Innovation can show up in many forms in healthcare, and some areas appear to be drawing the most attention today. “Weight loss, data analytics, tools and diagnostics, robotics, medical devices, and insurance are among areas we regard as having the highest investment appeal,” says Terry Sandven, chief equity strategist for U.S. Bank Asset Management Group. That view highlights both the human need at the center of healthcare and the practical reality that better tools and better systems can improve care while supporting stronger business results.

Weight loss stands out as a global challenge, and Eli Lilly is favorably positioned to solve the burdening weight problem with its GLP-1 drugs Mounjaro (for diabetes) and Zepbound (weight loss). Healthcare also generates vast amounts of information, which creates an opening for companies that help store, protect, and analyze data so organizations can make better decisions. Examples of technology-related firms with products or groups that extend into healthcare include Veeva, NVIDIA, Meta Platforms, Alphabet, Oracle, Amazon, Microsoft, and Palo Alto Networks, illustrating how healthcare innovation often overlaps with broader technology progress.

Tools, robotics, and medical devices can also help address staffing shortages and improve efficiency without compromising care quality. Companies operating in these areas include Intuitive Surgical, Medtronic, Stryker, Insulet, and GE Healthcare, reflecting the wide range of ways technology can assist clinicians and patients. These examples are not one-size-fits-all solutions, but they do show how many different business models can contribute to better outcomes across the healthcare system.

Healthcare sector risks to consider

Healthcare can deliver long-term promise, but short-term results can change quickly when rules shift around coverage, pricing, and business practices. Rising costs and workforce shortages can also squeeze profits, even when demand stays strong, because organizations may struggle to deliver care efficiently and scale new services. In managed care, higher-than-expected medical use can push costs up quickly and weigh on results, and larger companies’ outcomes can influence the sector’s overall earnings picture. As the industry becomes more digital, companies also face greater data and cybersecurity exposure, and new technology benefits may arrive more gradually in a highly regulated setting.

What’s the role of healthcare stocks in investor portfolios?

In short, the healthcare sector presents a paradox for equity investors. It is a sector that can experience volatility and risk, influenced by the success or failure of new drugs, regulatory pressures, rising costs, and technological disruption. It also holds meaningful growth potential, driven by demographic shifts and an increasing burden of chronic disease. AI stands out as a force that can improve efficiency and enable new models of care delivery, which may support both patient outcomes and profitability. Investors who focus on innovation, technological advancements, and emerging care models may be better positioned to participate in the sector’s next phase of growth. Consider consulting with your financial professional to determine how healthcare investments can work within the context of your overall financial plan.