Healthcare: Stocks Had a Mixed Q2, but Defensive Nature and Innovation Look Attractive

The Morningstar Healthcare Index slightly underperformed the Morningstar US Index in the first three quarters of 2025, due to US policy concerns for biopharma, healthcare plans, and med-tech firms. While clarity improved after most large biopharma firms signed voluntary agreements with the Trump Administration in late 2025, volatile demand for AI/Tech stocks led to mixed performance for the more defensive healthcare sector in Q2 2026. Near-term challenges remain for healthcare plans and some life science names, but we expect steady innovation to support solid performance for biopharma in 2026, the largest industry in healthcare.

We still see several undervalued opportunities in the US across biopharma (Pfizer, Bristol), medical devices (Boston Scientific, Zimmer Biomet), and distributors (McKesson, Cencora).

Volatility has remained elevated since the election of Donald Trump as president and Robert F. Kennedy Jr.’s appointment as secretary of Health and Human Services. We still see high uncertainty around many stocks, particularly in biopharma and healthcare plans, but clarity on drug pricing headwinds is improving, and plans look poised to see a better match between rates and utilization beyond 2026. As the market assigns winners and losers in the age of AI, we think healthcare is well-positioned. Most firms are likely to see incremental operational benefits from incorporating AI. Some industries (like biopharma) could see even broader benefits.

Biopharma companies vary in their dependence on US sales for branded drugs. With recent policies and individual firm contracts aimed at lowering US drug prices, industry pricing headwinds cover a spectrum based on geographic exposure. We forecast revenue for major biopharma firms to grow at a 4.3% CAGR through 2030. Drugs in the fields of immunology and obesity are the biggest drivers of in-line sales growth, but immunology is also a key area for patent expiration headwinds.

Top Healthcare Sector Picks

GE Healthcare GEHC

• Fair Value Estimate: $88.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

We attribute the recent selloff in GE Healthcare shares to the conflict in the Middle East and higher oil prices. The firm’s top line has very little exposure to this region (perhaps a low-single-digit percentage of revenue), but oil prices can pressure its margins due to higher transportation costs. Although there was significant progress toward a ceasefire deal in June, we think the margin pressure is likely to remain in the near term. We note that GE Healthcare has an excellent track record of responding to supply chain shocks, including during the covid pandemic, and we think shares are already pricing in a bearish scenario.

IQVIA IQV

• Fair Value Estimate: $268.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

IQVIA’s shares have been pressured by macroeconomic concerns and reduced biotech funding, which have contributed to more selective R&D spending and longer decision cycles, combined with broader market concerns about AI-driven disruption. However, we view these issues as near-term headwinds. IQVIA remains a global leader in clinical trial services and healthcare analytics, with a growing backlog that highlights its strength in booking new business. Its differentiated data assets and expanding AI capabilities position it to harness rather than be displaced by AI over time, supporting durable long-term growth.

Medline MDLN

• Fair Value Estimate: $48.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Medline shares have traded down 20% since April from a weak margin readout in first-quarter earnings and a warning letter from the FDA. On margins, rising input costs from geopolitical issues and a fluid tariff situation created headwinds, but we see these as largely transitory and continue to believe strong fundamentals remain unchanged. The FDA warning letter looks to be an isolated issue for a niche product, and the ensuing stock movement (down 7%) looks to be an overreaction in our view. We note that Medline is a leader in its market and see a lot of growth upside from new clients, customer penetration, and end-market expansion.