Hey there, bargain hunter. Let me tell you something the market has essentially stopped talking about – and that’s usually when the opportunity shows up.
Healthcare stocks have now lagged the S&P 500 for three straight years. That’s not a typo. The sector fell behind the broader index by 53% over a rolling two-year period through the end of 2024 – the largest gap recorded since at least 1991, according to Janus Henderson data. And the bleeding has continued into 2026.
What matters here is the valuation. Healthcare now trades at roughly a 20% discount to the S&P 500 – a gap that simply does not open up very often between a benchmark and one of its largest sectors. The discount was partly created by RFK Jr.’s appointment to lead HHS, which sent policy-sensitive names into a prolonged sell-off. Here’s the thing about policy fear, though: it tends to be front-loaded. The actual reforms almost always land softer than the headlines suggest.
The Numbers You Need to Know
- BMY (Bristol-Myers Squibb): Trading at roughly 10x forward earnings – one of the cheapest large-cap pharma valuations in the index. Q1 2026 revenue hit $11.5 billion, up 3% year over year. The growth portfolio expanded 12% to $6.2 billion and now represents more than half of total revenue. Camzyos revenue surged 97%. Breyanzi up 56%. Eliquis – the $4.1 billion-per-quarter blood thinner franchise – grew 16% in Q1 alone. Management is targeting $2 billion in annual cost savings by 2027.
- MRK (Merck): Trading at approximately 9x forward earnings – roughly half its historical norm. Yes, Keytruda’s patent window narrows in 2028. The market is pricing maximum pessimism on that event, which means the bar to outperform is low if the pipeline delivers.
- GE HealthCare (GEHC): Morningstar currently has this one flagged at a 30% discount to their fair value estimate. Medical imaging is a durable, non-discretionary business. Hard to argue with that setup.
The long-term structural argument hasn’t changed either. The Centers for Medicare and Medicaid Services projects U.S. healthcare spending will grow at 5.8% annually through 2033 as the baby boomer generation ages into peak consumption years. That’s a tailwind most sectors would love to have.
Slight tangent – it’s worth noting that healthcare ETFs saw twelve straight months of outflows totaling $11.5 billion through mid-2025, the worst of any sector. That kind of sustained institutional abandonment is often what precedes the sharpest recoveries. Fund flows follow narrative. When the narrative shifts, the flows reverse fast.
What Could Go Right vs. What Could Go Wrong
Bull case: Policy fears ease, patent cliffs are already priced in, and a single quarter of better-than-feared earnings triggers a re-rating. The XLV (Health Care Select Sector SPDR) actually outperformed the S&P 500 for the full decade after the Affordable Care Act passed in 2010 – a period that also started with maximum policy anxiety.
Bear case: RFK-led HHS pushes through broader drug pricing controls. Patent expirations hit harder than expected. Biotech pipeline failures pile up. The sector stays cheap because it deserves to be cheap.
The base case sits somewhere in the middle – a slow re-rating as earnings stabilize and the policy noise dissipates. That’s still a decent risk/reward if you’re buying at a multi-decade valuation low.
Worth a look at BMY, MRK, and GEHC before the crowd figures out what’s sitting in plain sight.
