Drug Stocks Are the New Safe Bet in a Shaky Market

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David Wainer

Fri, Feb 28, 2025, 5:00 AM 4 min read

The driving force behind healthcare’s resurgence? A shift in investor risk appetite, says Traver Davis, a healthcare strategist at Citi. With renewed recession fears and concerns over inflationary risks tied to President Trump’s tariff policies, investors are seeking stable, cash-generating companies with high dividend yields and reasonable valuations.

Healthcare stocks in the S&P 500 trade at about 18 times forward earnings—making them the third-cheapest sector, behind financials and energy, according to S&P Global Market Intelligence. That number would be substantially lower if Eli Lilly, the pricey obesity darling, were removed.

So healthcare stocks remain more affordable than nine other sectors including real estate, industrials, technology and consumer staples.

Big drugmakers—including Amgen, Johnson & Johnson and AbbVie—are making solid gains, even as the broader market has struggled this year. The NYSE Arca Pharmaceutical Index is up 10% year-to-date, while the S&P 500 has barely budged.

The rally marks a sharp reversal for an industry that lagged behind the S&P 500 by more than 40 percentage points in 2023 and 2024 combined.

Outside of Eli Lilly and Novo Nordisk—the dominant obesity-drug makers—healthcare stocks struggled under weak growth expectations and policy risks. The Inflation Reduction Act of 2022, signed by President Joe Biden, allowed Medicare to negotiate prices on top blockbuster drugs, squeezing pharma profits. The selloff deepened in late 2024 after Trump appointed industry skeptic Robert F. Kennedy Jr. as health secretary.

But with healthcare still a bargain in an overpriced market, investors may find the political risks are worth taking. Besides, drug-price reform isn’t the biggest threat right now—broader risks, like a potential trade war, loom larger.

One area where investors should tread carefully: vaccines. Moderna has been hit hard by fears that Kennedy will fuel more skepticism around vaccine policy. On Thursday, the stock tumbled after Bloomberg reported that health officials are re-evaluating a Biden-era contract awarded to the company for bird-flu vaccine development, bringing its decline so far this year to 25%.

Stocks that had been stuck for years are now moving higher. J&J, which faces uncertainty over baby powder lawsuits, has risen 13% this year. Gilead, a company that struggled to find momentum for years, has climbed 21% in 2025 and is up 53% over the past 12 months. Even struggling chains CVS and Walgreens are seeing strong gains, up 44% and 20%, respectively. This is occurring amid an improving earnings outlook and, in Walgreens’ case, takeover speculation.

Investors looking for a way in have plenty of affordable companies to choose from, including J&J, Novartis, Amgen, Roche and AstraZeneca.

But not all drugmakers are benefiting equally. As Citi’s Davis explains, investors are gravitating toward companies with stable growth drivers and minimal near-term patent risks.

That explains why Gilead, Vertex, and Eli Lilly—companies with growing new products and fewer major patent expirations—have led the sector’s rally.

Meanwhile Merck, Pfizer, Bristol-Myers Squibb and Regeneron, all of which face more immediate threats to key products, haven’t kept pace. If the broader market rotation into value stocks deepens, these laggards could benefit, too, thanks to their still stable businesses.

On the flip side, stretched valuations for high-growth winners of recent years, including Intuitive Surgical, Boston Scientific and Lilly, could come under pressure in a broader rotation.

Healthcare is proving that investors don’t need to chase the AI hype to find opportunities in 2025.

Write to David Wainer at david.wainer@wsj.com