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.
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.
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.
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
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
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
“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 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.
Healthcare represents one of the largest sectors of the major market indices. As of November 30, 2024, it was the third-largest sector in the large-cap S&P 500,2 and the second-largest industry sector in the small-cap Russell 2000 Index.3 With healthcare services representing more than 17% of the economy,1 healthcare plays an important role in the portfolios of many investors.
According to S&P Dow Jones Indices, the healthcare sector was expected to contribute approximately 12.6% of estimated corporate earnings generated by S&P 500 companies in 2024’s fourth quarter. Healthcare ranked behind only the financials and information technology sectors in terms of contributions to the S&P 500’s earnings. S&P’s estimates project healthcare stocks will generate earnings growth of 10.2% in 2024, outpacing earnings growth expectations for the broader S&P 500.2
Over the past 50 years, healthcare has become an increasingly visible component of the U.S. economy. Significant expenditure growth occurred between 1960 and 2005, growing from 5% in 1960 to 15% of the economy in 2005. Expenditure growth as a percent of the nation’s economy (using Gross Domestic Product or GDP) has moderated since, except for a spike in costs in 2020, the year that COVID-19 emerged. In 2024, healthcare spending is projected to represent 17.7% of the economy.2 The rise in healthcare spending is related in part to the aging of America’s population, as older Americans represent the largest users of healthcare services.
Investors focus on evolving dynamics in the stock market’s energy sector.
While technology stocks cooled in the third quarter, the sector remains poised to outperform the broader S&P 500 in 2024 for the second year in a row.
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