Quick Take: Health Care’s Illusion of Value

What is the future for the health care sector? Does its discounted valuation versus the S&P 500 indicate a possible entry point, or do risks still outweigh upside potential? 

The last several years have been difficult for the healthcare sector. The sector demonstrated a degree of defensiveness in 2022 compared to the S&P 500, but that strength was followed by dramatic underperformance in 2023 and 2024. One challenge, health care policy concerns—a longstanding lodestone weighing on the sector—that have only heightened since the presidential election. “Trump gives drugmakers 60 days to slash prescription drug prices” read one major headline on July 31st. That was, of course, a reference to the President’s executive order known as the “most favored nation policy” aiming to tie U.S. drug prices to lower prices abroad. And Trump’s latest proposal for 200-250% tariffs on pharmaceutical imports poses an additional level of uncertainty. Prices and the supply chain could be significantly impacted for years. J.P. Morgan estimates if the “most favored nation” approach were adopted, drug prices could decline by 5%-10% and U.S. large cap pharma earnings could decline by 9% by 2031.[1]

Is the Health Care Sector’s Value Discount an Illusion? 

Source: Bloomberg, data as of 8/19/25. 10-year average from 2014–2024. Past performance does not guarantee future results. 

Another reason to be wary? Many who see brighter prospects for health care point to its relative valuation versus the S&P 500. After all, as this chart shows, the S&P 500 health care sector is trading at only two-thirds the price-to-earnings (P/E)[2] of the S&P 500. But that apparent discount valuation might not be a sufficient green light in this case. Much of the gap can be attributed to the narrow mega-cap technology rally driving high relative S&P 500 valuations and creating an illusion that health care is at a relative discount. In reality, the standalone P/E of the health care sector is quite close to its 10-year average—not necessarily a value. With headwinds for the sector likely to continue, a cautious approach may be warranted, and investors might want to consider limiting their exposure to the sector. 

[1] Source: J.P. Morgan, Eye on the Market, “Sick as a Dog,” 8/12/25.

[2] “Price-to-earnings” (P/E) shows how much investors are paying for a dollar of a company's earnings. P/E helps to assess the relative value of a company’s stock by measuring its share price relative to its earnings.