Why U.S. Healthcare Is Struggling Right Now

Since the start of the year, U.S. healthcare stocks are down about 2 percent and roughly 12 percent over the last twelve months. Over the same periods, the S&P 500 is up about 13 percent year to date and 16 percent over twelve months. The disconnect is striking because healthcare remains the third largest contributor to S&P 500 revenue and earnings growth. Street estimates point to S&P 500 EPS growth of about 11 percent in 2025, and about 12 percent for healthcare. To understand why the sector is not getting more love, I spoke with several rating agencies in recent days.

A Risk-On Market Is a Headwind for Defensives

When the market is in risk-on mode, with growth holding up and the Federal Reserve adding liquidity through rate cuts, defensive sectors often lag. That is part of the current underperformance. Agencies also highlight tariff noise and a cautious near-term outlook that caps upside for the large-cap leaders that dominate sector indices.

What Rating Agencies Expect

Across U.S. healthcare, agencies expect mid-single-digit revenue growth, lower than the roughly 9 percent the sell side is modeling. They see the biggest benefits flowing to smaller companies, which tend to be more leveraged and therefore gain more from lower interest costs. Lower rates help earnings and free cash flow, which supports deleveraging and a reduction in perceived risk. Since Powell’s shift in tone at Jackson Hole a month ago, healthcare has been the third best performer inside the small and mid cap Russell 2000. The issue is that most healthcare indices are dominated by giants. The top ten companies account for more than half of the U.S. healthcare index. Johnson & Johnson, Eli Lilly, AbbVie and UnitedHealth together make up about a third of the total. Strength in smaller names does not fully show up in the headline benchmarks.

Health Insurers

Insurers have been hurt by heavy exposure to Medicare. After the Affordable Care Act, many private insurers began covering lower income families in exchange for fixed payments from the government. Inflation in 2021 and 2022 lifted medical claims while the Inflation Reduction Act capped remuneration, pushing the medical loss ratio higher and compressing EBIT margins. Some companies, such as Humana and CVS, have repositioned by cutting Medicare exposure and are beginning to see margin and share price improvement. UnitedHealth kept margins resilient through 2024, which some observers link to aggressive practices that are now under Department of Justice review, but the shares fell sharply in 2025.

Looking ahead, agencies see upside for insurers that reduced Medicare exposure, with average government reimbursements expected to rise by roughly 3 to 4 percent next year after two years of declines. Challenges may persist for those still heavily reliant on Medicare, with a larger benefit likely when the next repricing cycle lands in 2027. Overall, agencies view these as near-term issues inside a concentrated and regulated industry, where competition is limited and premium increases, once repriced, can restore stability. That assessment helps explain continued interest from long-term institutional investors.

Healthcare Services

Clinic operators face mild pressure. Patient volumes are normalising after the post-pandemic surge and telemedicine is taking a larger share. The OBBBA plan, which targets one trillion dollars of healthcare savings, is not expected to bite hard in the near term, since roughly three quarters of the cuts would start only after 2029. A future administration could also change course.

Source: State Street

Medical Devices

Device makers look the most resilient. Competitive landscapes are concentrated, which allows companies to pass through higher input costs and tariff effects to customers. A lighter regulatory touch in the United States should support more products reaching the market and pricing power. The risk is that any broad U.S. healthcare budget cuts would add volatility.

Source: iShares

Pharmaceuticals

There is more concern around branded pharma because of tariff policy. The United States imports around 200 billion dollars of medicines each year, inside a total market of about 600 billion. A large share comes from Europe, roughly 140 billion. The European Union secured a tariff level near 15 percent on branded drugs, which agencies estimate could cost about 21 billion for the companies involved. Switzerland remains at about 39 percent, a rate intended to encourage onshoring of production. Agencies estimate a 3.5 to 4 percent hit to EBITDA margins from these changes, although many patent-protected franchises still run near 40 percent margins. Capital spending is likely to rise as production shifts onshore, which means higher depreciation and some pressure on EPS. Even so, most large pharma groups have the strength and pricing power to pass costs on to end customers.

The Most Favored Nation rule will also matter. It requires U.S. prices to match the lowest price paid by any reference country, which in practice pushes up prices abroad. This is already visible in the United Kingdom. The full effects will take time. Many companies built inventories ahead of the tariff changes, so the benefits will show more clearly over the next twelve to eighteen months, likely in the second half of next year.

Source: Financial Times

Generic drugs are a different story. European generics are largely excluded from the new tariffs, but U.S. generic manufacturers that source active ingredients from China face higher input costs. Margins in generics are already lower, often between 15 and 20 percent, which means pricing will need to rise in a competitive market. A potential offset could come from tighter Indian export rules, which may reduce global supply and ease competitive pressure. Novo Nordisk may also benefit if tariffs make it harder for U.S. compounding pharmacies to source Chinese active ingredients used to imitate anti-obesity treatments.

Bottom Line

Healthcare is lagging in a risk-on tape and the megacap concentration of sector indices masks improving trends in smaller names. Insurers are working through Medicare headwinds, services are digesting normalising demand, devices remain robust, and pharma is navigating tariffs and onshoring. Agency views point to steady, if unspectacular, growth with the possibility of a stronger turn as lower rates filter through balance sheets and policy changes become clearer.