Healthcare Stocks Got Left Behind in the Market Rally. Are They a Buy?

Key Takeaways

• While the broad stock market has rallied since April, healthcare stocks have lagged.
• Analysts say the sector is facing major headwinds from policy concerns, including President Trump’s intention to lower US drug prices.
• Underperformance by UnitedHealth accounts for the largest drag of any single stock.
• Morningstar analysts say healthcare stocks overall are at their cheapest in over five years.

The stock market is again in the green for 2025, having made up all of its April losses and then some. Technology stocks led that rally, and the entire market followed suit—except one sector. Healthcare stocks are facing policy headwinds under President Donald Trump’s administration. The underperformance of insurance giant UnitedHealth Group UNH is dragging the sector lower as well.

Healthcare stocks are only up 1.5% since the market bottom, and they remain down 2.6% for the year. That’s a major change from just a few months ago, when healthcare was the market’s top-performing sector amid a dramatic rotation out of Big Tech.

Why Are Healthcare Stocks Struggling?

Karen Andersen, Morningstar’s director of healthcare equity research, points to a handful of factors weighing on the sector. For biopharma stocks and drugmakers, a Trump administration push to lower prescription drug prices appears to be outweighing solid first-quarter earnings and the potential for resilience in the face of tariffs. “That’s the big threat creating an overhang on the space,” she says.

Lower prices mean tighter margins and could reduce incentives for drug development down the line, though the details of Trump’s policy push remain unclear. The president issued an executive order as part of this initiative last month, calling for negotiations between drugmakers and the federal government.

Also weighing on the sector is the dismal performance of UnitedHealth, which has dropped an eyewatering 46% since April 8, accounting for the largest drag of any single stock on the total market, according to data from Morningstar Direct.

UnitedHealth is grappling with controversy surrounding the mispricing of Medicare Advantage plans and allegations of fraud. Morningstar recently raised its Uncertainty Rating for the stock, which makes up 6.7% of the Morningstar US Healthcare Index by weight.

For names in the research and diagnostics category, Andersen points to waning demand from academic and government research, especially if research funding is subject to federal cuts. “That probably takes a little bit of wind out of their sails,” she says. “It probably makes it a lot harder for investors to get excited.”

Concerning new tariffs announced or threatened by the Trump administration, Andersen cautions investors against taking a blanket approach. “You have to drill down to the company level,” she says. “Every company has a totally different exposure.”

Are Healthcare Stocks Cheap?

While the stock market as a whole has crept closer to Morningstar’s estimate of its fair value over the past two months, the healthcare sector has only become cheaper.

As of June 3, healthcare stocks were trading at an 11% discount to Morningstar’s estimates of the sector’s fair value, with a price/fair value ratio of 0.89. That’s a major change from the early part of this year, when healthcare stocks traded at a premium of as much as 6% while the broader market looked cheap.

Morningstar analysts determine whether stocks are over- or undervalued by comparing their current prices with estimates of their intrinsic worth. A price/fair value ratio higher than 1 indicates a stock is overvalued, or expensive, while a ratio under 1 indicates it’s undervalued, or cheap. The further the distance from 1, the greater the premium or discount. As of the end of May, healthcare stocks were the cheapest they’d been since the pandemic selloff in March 2020.

Opportunities in Healthcare Stocks

Andersen says there are still good buys among healthcare stocks, though she notes that the policy uncertainty hanging over the sector may weigh on it in the near term.

Among drugmakers, Merck MRK and Pfizer PFE are rated 5 stars by Morningstar analysts, while Novo Nordisk NVO and Bristol-Myers Squibb BMY are rated 4 stars. In that category, she says a sweeping, across-the-board reduction in drug prices to international levels is “a lower probability” than smaller reductions targeted at specific segments of the US drug market.

For research-oriented companies like Thermo Fisher Scientific TMO, Anderson says she doesn’t expect pressure on funding to last forever. “I think that’s something that would be corrected at some point. Whether that’s next year or in three years, we don’t know.”

There’s also upside when it comes to UnitedHealth, even after accounting for the heightened controversy and risk surrounding the stock. “We think the stock is moderately undervalued for the risk surrounding it,” says senior Morningstar analyst Julie Utterback. “There could be a pullback in their earnings power, but in the long run, given the trends in the US in terms of healthcare spending, we think they have the opportunity to grow at a decent double-digit rate.”