Healthcare’s recovery gathers pace

After a challenging period, pharmaceutical stocks have gained ground this year amid easing US policy headwinds, innovation in drug development and growing adoption of artificial intelligence. With favourable structural and tactical trends, the broader healthcare sector remains among our most preferred.

Since 2022, the healthcare sector has experienced a long period of underperformance, due to an increase in policy uncertainty in the US, its largest and most profitable market. This put pressure on pricing and reimbursements, as well as increasing import tariffs. A US executive order designed to benchmark American drugs against the lower prices charged in other developed countries was accompanied by drug reimbursement reforms, and threats of elevated sector tariffs.

At the same time, big pharma firms face a threat to earnings as the largest ‘patent cliff’ in decades looms. Their intellectual property protection from cheaper generic competition expires on some USD 300-400 billion of branded drugs between now and 2035.

For most of 2025 therefore, US and European pharmaceutical stocks underperformed their broader domestic equity markets, and investor sentiment had become very negative. The healthcare sector remains a major component of developed-market equity indices, despite a recent decline in its weighting. It is still the largest sector in the Swiss Market Index with a weighting of nearly 40%, and accounts for around 10% of the S&P 500, and 6% of the MSCI Europe.

Policy headwinds have subsided

US policy uncertainty has now subsided materially, helping valuations of pharmaceutical and biotech firms recover ground. Big drugs companies have promised to invest more in US manufacturing, and most have now signed US pricing deals that were more favourable than initially feared. There are some signs that medical technology firms are following suit with their own deals and investment pledges.

Big drugs companies have promised to invest more in US manufacturing, and most have now signed US pricing deals that were more favourable than initially feared

That does not mean that policy pressure has disappeared. Reductions of almost USD 1 trillion to previously projected US Medicaid spending, and spending cuts worth an additional USD 500 billion to Medicare, are material and could reduce US healthcare coverage and drug demand over time. While an investigation for the pharmaceutical sector under Section 232 of US trade legislation has been completed, the threat of new tariffs, or more supply chain disruptions, continues to hang over the medical devices and equipment industry.

Yet the legislative threat from the Trump administration has in general been lower than expected. Nor is pressure on US drug pricing a new phenomenon. Policymakers have been trying to curb US prices for decades, and drugs companies have increasingly embedded this into their strategic planning. The same goes for the revenue erosion from expiring patents, which has been modelled by both drugs firms and their investors.

Innovation in drug pipelines

Crucially, the pressure from future patent expiries is now acting as a powerful driver of innovation, as drug companies seek to replenish their pipelines, and revenue streams.

The pressure from future patent expiries is now acting as a powerful driver of innovation

The single biggest growth market is in obesity drugs. These GLP-1 treatments, initially designed to treat diabetes, have expanded rapidly into obesity. The prevalence of both conditions is rising, and consensus estimates expect the global market for GLP-1 drugs to grow from just under USD 97 billion in 2026, to nearly USD 148 billion by 2030. New formulations and oral treatments are helping expand their patient population.

Drug makers are also making strides in other diseases, particularly via drugs that harness the body’s own immune system. This includes a new personalised mRNA melanoma vaccine that is expected to be launched in 2027. Immunotherapies are moving into earlier stages of cancer treatment, while a new generation of targeted medicines and combination therapies is showing encouraging results. And as the patent on the leading multiple sclerosis drug approaches expiry, its creator is preparing to launch a new treatment addressing the broadest spectrum of the disease.

The single biggest growth market is in obesity drugs

The outlook for other healthcare companies is also looking more positive. High spending by big drugmakers into research and development (R&D) is helping companies that provide life science tools, and those performing outsourced research and production.

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Biotech stocks have recovered

Biotech companies are also benefiting from big pharma companies’ quest for new drugs, as those with promising potential new treatments become acquisition targets. Merger and acquisition (M&A) activity has accelerated since 2025, and we expect the trend to continue. So far, the industry is focusing on targeted pipeline acquisitions rather than mega-mergers with more questionable value for investors.

Improving conditions for biotech funding, and the ‘reshoring’ of some pharmaceutical manufacturing to the US, should also support demand for life sciences equipment over time. Medical technology companies continue to face a complicated environment in China with healthcare pricing reforms, anti-corruption measures and lower hospital spending, although many of their valuations now reflect these challenges.

With patent expiries now extending to complex biological treatments, new opportunities are opening up for generic drug manufacturers. The global ‘biosimilars’ market was around USD 40 billion in 2025 and industry reports project it to grow at a roughly 18% compound annual growth rate over the next decade.

Gains from AI adoption

We also expect healthcare companies to extract further AI efficiency gains. AI is already embedded in healthcare services, where it has reduced the administrative burden. For clinicians, AI tools are used most widely in radiology and imaging, with applications expanding into cardiology and neurology. Drug companies are using it to help discover new drug candidates and run more efficient clinical trials. In the years ahead, pharmaceutical companies anticipate AI handling 10–30% of preclinical work, potentially reducing drug development costs by 16% and cutting time-to-market, according to Bloomberg Research. Chinese firms in particular are embracing AI at pace.

Given all these tailwinds, we expect earnings growth across the healthcare sector to accelerate to 18% in 2027, the fastest-growth sector after IT. This is being boosted by a number of non-recurring items, but also by rising earnings from major pharmaceutical companies, which account for over half of sector profits, and a recovery in managed care profitability. Underlying earnings growth is slower, but still in the region of 10%.

The earnings rebound underpins our ongoing preference for the healthcare sector

Big drug companies in the US and Europe reported better-than-expected underlying earnings growth of almost 10% in the second quarter, and we expect underlying growth of close to 5 or 6% in the third quarter. Earnings are also reflecting higher demand from longer-term trends including ageing populations, an expanding middle class, more sedentary lifestyles, and preventative care.

In the shorter term, the earnings rebound underpins our ongoing preference for the healthcare sector. Valuations for big US drugs companies are now in line with historical averages, but do not look overly demanding given growth prospects. In other sub-segments of the healthcare sector, valuations are lower. Healthcare stocks also offer equity investors some diversification from tech-heavy indices, and a different way of gaining exposure to the benefits of AI.

In the coming months, we think valuations may benefit from a moderation in global yields, as investors scale back their views on future monetary policy tightening. We also expect the US midterm elections to deliver a divided government, which would create legislative gridlock, and less scope for radical policy changes.