By Teresa Rivas

Even when campaign policies are put in place, they don't always translate cleanly to stock action. Just take a look at the healthcare sector.

By all accounts, healthcare stocks should be in the dumps. The sector sold off heavily after the election as investors worried about the incoming Trump administration's actions. Robert F. Kennedy Jr., the most high-profile critic of healthcare companies in the Trump camp and the head of the Health and Human Services Department, has long been skeptical of vaccines and has promoted conspiracy theories about them, and also criticized popular weight-loss drugs.

It's worth remembering that promises and policies don't always correlate to stock market moves, especially in the long term, in the way that intuition might suggest. That was on full display during both the first Trump administration and Biden's time in office, when energy stocks expected to benefit from their vastly different approaches on climate change didn't pan out the way investors hoped: Traditional energy stocks didn't thrive under Trump, just as green energy didn't live up to expectations under Biden.

That disconnect helps explain why healthcare stocks have been thriving despite ongoing uncertainty about government policy, to the point that healthcare is the best-performing sector in the S&P 500 this year.

The Health Care Select Sector SPDR exchange-traded fund (ticker: XLV) is up 7.3% as of Tuesday, the best performance of the 11 sectors in the index. No other sector has cracked the 7% mark this year; the communication sector, as tracked by the Communication Services Select Sector SPDR ETF $(XLC)$, is the next biggest winner, up 6.7%. The S&P 500 as a whole is up just 1.3% since the start of 2025.

That can be explained in part by the market's recent declines. After closing at its highest levels on record early last week, the S&P 500 ended 1.7% lower for the week. It has declined further this week as concerns about the economy and artificial intelligence weigh on markets.

During market pain, investors usually flee to safety, and that's a big tailwind for healthcare stocks, whose largely necessary services are viewed as defensive plays that can provide some ballast in periods of volatility. Sevens Report President Tom Essaye highlighted the healthcare sector ETF in a note this week, saying that "defensives continued last week's outperformance, reflecting those small-but-growing growth concerns from investors."

That harkens back to 2018, the last time the sector outperformed. The healthcare ETF climbed by about 5% that year, while the S&P 500 tumbled by more than 6%.

"Interestingly that was another year that saw heightened volatility amidst geo-political uncertainty," writes BTIG Chief Market Technician Jonathan Krinsky. "While it's far too soon to tell whether health care will be 2025's best sector, for now it fits the bill as a somewhat defensive group that is likely under-owned."

The XLV ETF -- up more than 2% in the last week alone -- is close to making a multimonth relative high, "which suggests it should be given the benefit of the doubt," he writes. Based on stock charts, he highlights Johnson & Johnson, Gilead Sciences, Bristol-Myers Squibb, GE Healthcare, Cardinal Health, and Incyte Corp as also in compelling upward trends.

In late November, Barron's argued that the near-universal bearishness on healthcare meant the stocks were worth a look. Last week, we reiterated that funds like XLV, Fidelity Select Pharmaceuticals, Janus Henderson Global Life Sciences, and PGIM Jennison Health Sciences were also worth a look as the market was too pessimistic.

That said, some industries within health care have continued to struggle. Morgan Stanley remains cautious on hospitals, as both "perceived and real threats of spending cuts are impacting hospital stock performance," notes analyst Craig Hettenbach. "While some of this may be priced in, we don't anticipate a sustainable rebound in stocks until there's more clarity on what policies will be implemented."

Clarity is a scarce commodity in 2025. For now, investors are feeling safer in healthcare stocks than in many other areas of the market. Not to mention that stress-snacking during selloffs could prime the pump for more GLP-1 demand.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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February 25, 2025 16:16 ET (21:16 GMT)

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