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Seeking Stocks with Vitality in the Volatile Healthcare Sector

24 February 2025
3 min read
| Co-Chief Investment Officer and Senior Research Analyst—US Growth Equities
Healthcare Stock Valuations Are Compelling, Given Strong Fundamentals
After sluggish returns, healthcare stocks are just 10% of the global benchmark, but earnings outlooks and low valuations suggest strength across the sector.

Historical analysis and forecasts do not guarantee future results. 
P/E ratio: price-to earnings ratio; EPS: earnings per share
*Both forward P/E ratio and forward EPS estimates use blended 12-month forward estimates for the MSCI World Health Care Index.
Left display as of January 31, 2025; right display as of February 21, 2025.
Source: Bloomberg, MSCI and AllianceBernstein (AB)

Investors cooled to the healthcare sector in 2024, which dramatically trailed global and US equity markets for the year. As a result, the sector’s share of the MSCI World benchmark shrank to 10.7%—the lowest in more than a decade (Display).

Healthcare stocks were hurt by volatility from factors that include policy-related uncertainty, which hasn’t faded since the US election. Many investors are now asking: how will the policy changes under a new US administration affect healthcare companies?

Healthcare Stocks Are Hurting but Healthy

As we see it, these concerns don’t reflect healthcare’s fundamental performance, which remains more resilient than perceived. In fact, even as the healthcare sector’s price/earnings valuations have fallen, earnings estimates have trended significantly higher. Given the strong outlook, we think active equity investors can still find healthcare companies with strong growth potential—and at historically compelling prices.

The healthcare sector is diverse, so investors should cast a wide net in the hunt for quality companies. But stock selection remains key, since not all healthcare firms thrive under similar conditions. For instance, some are closely tied to consumer discretionary trends while others succeed through technology advancements such as artificial intelligence. Similarly, a firm may have a strong business model and favorable outlook but remain throttled by economic downturns in its primary markets.

We believe companies with innovative products and services that address acute challenges facing healthcare systems should ultimately prevail. To us, investing in long-term growth isn’t about finding the next groundbreaking cure but rather discovering companies with high-quality businesses and consistent profitability, from healthcare providers to equipment makers.

Healthcare’s Benefits Beyond Compelling Prices 

We think today’s exceptionally low valuations signal underappreciated vitality that could offer attractive entry points for investors who know where to look. But the healthcare sector provides more than just attractive valuations. For example, the defensive nature of healthcare stocks can also add ballast to a portfolio amid uncertain economic climates, especially if inflation and interest rates remain higher for longer. Then, there’s the upside potential of companies whose solid fundamentals, we believe, should be rewarded as the market starts to widen its focus beyond a handful of technology names.

Does the political climate offset these benefits? In our view, disruptive healthcare legislation is unlikely in the near future, considering the Republican party’s narrow majority in Congress. And the new leadership of Health and Human Services has softened its stance on several hot-button topics, including vaccines, while indicating the prioritization of food safety.

Healthcare could remain volatile for some time, and near-term political and policy risks to healthcare stocks certainly bear watching. But we find that focusing on high-quality businesses across the broad healthcare spectrum can help investors find stocks with long-term return potential that is unlikely to be derailed by policy change.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

About the Authors

Vinay Thapar joined AB in 2011 from American Century Investments as a senior investment analyst responsible for healthcare. Prior to that, he worked for eight years at Bear Stearns in the Biotech Equity Research Group, most recently as an associate director.

A big believer in research and development and developing intellectual property, Thapar's iterative, collaborative approach leverages fundamental research and proprietary technology to conduct research tailored to each strategy. "The idea is to find good businesses," he says, "Not to try to predict short-term price performance."

The opportunity to learn about different businesses, how they allocate capital, how they develop and how to speak with different investors drives Thapar. "It's a job with no static rules," he says. "The markets can change from day to day."