CVS and Other Healthcare Stocks Are Soaring: Why the Sector Is No Longer Sick
Background
For several years, healthcare stocks have languished in the shadows, failing to keep up with the broader market’s impressive rallies despite the phenomenal performance of obesity drugmakers like Eli Lilly and Novo Nordisk. However, the outlook for healthcare stocks has dramatically improved at the start of 2025. With companies such as CVS Health on the rise, is it safe to say that the worst is finally over for big pharmaceutical companies, biotech firms, insurers, and medical device manufacturers?
Recent Performance of Healthcare Stocks
CVS Health, which houses the insurance giant Aetna, the pharmacy-benefit manager Caremark, and its vast chain of drugstores, has emerged as the second-best-performing stock in the S&P 500, experiencing a nearly 30% spike as of Wednesday. In comparison, rival pharmacy chain Walgreens Boots Alliance has enjoyed a 20% increase in its stock value. Other players, such as the healthcare insurer Humana, have seen their shares rise by more than 15%. Additionally, notable medical equipment companies like DaVita, Henry Schein, Medtronic, DexCom, Thermo Fisher, and Baxter are benefiting from double-digit percentage gains in 2025, indicating a robust comeback for the sector.
Evaluating Valuations
Despite the promising gains, many leading healthcare stocks have yet to reach their full potential, lagging behind the broader market. The Health Care Select Sector SPDR exchange-traded fund (ETF) is currently trading at less than 18 times earnings estimates for this year—about a 20% discount to the S&P 500’s price-to-earnings ratio, which exceeds 22. Historically, the healthcare sector trades at approximately 13% below the aggregate market multiple, according to data from FactSet.
“The healthcare sector is cheap. It’s hated,” commented Sandy Villere III, a portfolio manager with Villere & Co. He emphasized that this environment presents an excellent opportunity for value-seeking investors. Villere noted that many healthcare stocks offer attractive yields, with dividends exceeding 1.5%.
His firm is taking a broad approach to invest in the sector and has established positions in various companies, including Abbott Laboratories, infusion services firm Option Care, biotech Ligand Pharmaceuticals, medical device maker Teleflex, and Idexx Laboratories, which specializes in diagnostic products for veterinary use.
Future Earnings Prospects
The earnings outlook for the healthcare sector appears promising; analysts predict a solid recovery following a significant drop in 2023, with an anticipated 20% earnings growth for 2025 and an additional 10% gain in 2026. This marks a notable rebound compared to the modest 5% increase seen last year.
Investors are also beginning to feel less anxious about major regulatory changes from Washington, D.C. Although concerns remain regarding the future of vaccine makers in light of Robert F. Kennedy, Jr.’s potential appointment as Health and Human Services Secretary, there is no certainty that this position will significantly impact healthcare policy. Furthermore, potential bipartisan legislation targeting the influence of healthcare companies, particularly those controlling large pharmacy-benefit managers like CVS, UnitedHealth, and Cigna, faces uncertainty.
Investment Sentiment
Michael Arone, the chief investment strategist for State Street’s SPDR Business, believes that healthcare stocks will outperform the S&P 500 this year, describing the sector as “ripe for an upside performance surprise.” Historically, the healthcare sector has shown resilience, outpacing broader market performance during the first year of every Republican administration since 1981. Additionally, the sector’s current weighting in the S&P 500 is nearing a 25-year low, providing further reasons for optimism.
Portfolio managers Andy Acker and Dan Lyons from Janus Henderson also posit that the market might be overly concerned about potential political disruptions. They note a historical tendency for healthcare stocks to react negatively to policy uncertainty, often overreacting before more detailed and nuanced information becomes available. They emphasize that Kennedy’s potential approval as HHS Secretary does not eliminate other influencers in Washington, and any changes at the Food and Drug Administration (FDA) should be viewed cautiously.
Conclusion
In summary, healthcare stocks appear to be on an impressive upswing, fueled by significant market interest and favorable earnings forecasts. With valuations remaining attractive and dividends available for income-focused investors, this might be an excellent opportunity for entry into the healthcare sector. As highlighted by experts, current conditions reflect an environment where overall sentiment may be overly bearish, paving the way for potentially strong future returns for investors willing to take the plunge into the healthcare market. The current market dynamics suggest that the so-called “sick” sector is gradually finding its footing and gearing up for a healthy recovery.