By Paul R. La Monica

You'd think that the healthcare sector would be one of the worst performers in the market this year due to worries about Health and Human Services Secretary Robert F. Kennedy Jr. and the terrible earnings guidance from insurer UnitedHealth Group. But the sector is more than holding its own in 2025.

The Health Care Select Sector SPDR exchange-traded fund (ticker: XLV) is flat this year while the broader market is down. Tariffs and trade war worries are less of a concern, given the domestic focus of many companies in the industry. And investors also seem to appreciate that many of the companies in the group are relatively recession-resistant.

"People are going to keep getting sick, pay their insurance premiums and see their doctor," Jonathan Curtis, chief investment officer at Franklin Equity Group, said at a recent media event. "This is a defensive sector."

But an exciting one too. Curtis said there are plenty of compelling opportunities in the sector due to innovative medications like GLP-1 weight loss drugs, as well as treatments being developed by biotechs through genomics research. Mounjaro and Zepbound maker Eli Lilly, which is the largest holding in the Health Care ETF, is up 11% in 2025, while Johnson & Johnson and Amgen, both Dow Jones Industrial Average components, are up this year thanks to solid earnings and strong pipelines.

It's also worth noting that despite UnitedHealth's recent earnings woes, other insurers continue to be market leaders, a potential sign that UNH's problems are more company-specific. Aetna owner CVS Health is up more than 45% this year, making it the second-best performer in the S&P 500, while rivals Elevance Health and Cigna Group are up 16% and 21%, respectively.

Even sleepy medical equipment companies, which benefit from an aging population, are worth a look, says Mike Rode, senior investment director at American Century Investments. He likes Medtronic, which makes pacemakers and insulin pumps, and Zimmer Biomet Holdings, which manufactures a significant portion of its hip replacements in its home state of Indiana. Zimmer and Medtronic are also relative bargains, trading for just 12 and 15 times earnings estimates, respectively.

In fact, the entire sector is trading at a reasonable price of just 17 times forecasted earnings, a larger than usual discount to the S&P 500's 21 times. Healthcare stocks, despite their outperformance this year, continue to trail the S&P 500 over the past few years and could have some catching up to do. Jay Kaeppel, senior research analyst at SentimenTrader, noted in a recent report that the level of insider buying in healthcare stocks has lately increased. That's potentially a very good sign.

"While insiders are generally not 'precision market timers,' they are rarely wrong 1-3 years later," Kaeppel writes. "All of this strongly suggests that investors take a closer look -- and keep a close eye on -- the healthcare sector for a buying opportunity."

So forget what's going on in Washington, and ignore UnitedHealth. There's plenty more to focus on in healthcare -- and, dare we say, healthy profits to be made in the sector.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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April 25, 2025 02:00 ET (06:00 GMT)

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