Healthcare: Increased Clarity on Drug Pricing and Tariffs, Solid Performance Expected for 2026

The Morningstar Healthcare Index slightly lagged the broader market in 2025, with a total return of 15.2%, compared with 17.4% for the US Market Index. This follows significant underperformance in the first three quarters of the year and significant outperformance in the fourth quarter, tied to changing uncertainty around potential US drug pricing policy and healthcare tariffs. In biopharma, clarity increased beginning with Pfizer’s Sept. 30 deal with the Trump administration to lower Medicaid prices in exchange for a three-year tariff reprieve. We see potential for solid healthcare performance in 2026, driven by its defensive profile and innovation.

The sector appears fairly valued overall, with a 1.02 market-cap-weighted price/fair value estimate ratio as of Dec. 31. Medical distribution stands out as the most overvalued industry, while healthcare plans and providers appear the most undervalued.

Volatility increased following the election of Donald Trump as US president and Robert F. Kennedy Jr.’s appointment to lead the Department of Health & Human Services. We still see high uncertainty around many stocks, particularly in biopharma and healthcare plans, although clarity on drug pricing headwinds is improving, and plans look poised to see a better match between rates and utilization beyond 2025. Within the obesity market, Novo Nordisk trades at a discount to its fair value estimate; we still see strong competitive advantages despite Eli Lilly’s growing market share.

The GLP-1 and renal denervation markets represent two high-conviction growth opportunities heading into 2026. While we expect Lilly to retain more than 50% share of the GLP-1 market over the medium term, we see underappreciated innovation potential from Novo and emerging challengers like Pfizer, Roche, and Amgen. We expect the renal denervation market to exceed $10 billion globally by 2035, driven by volume and pricing, with Medtronic best-positioned to benefit in the medium term as the industry leader.

Top Healthcare Sector Picks

GE Healthcare

• Fair Value Estimate: $98.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

In April 2025, GE HealthCare’s GEHC shares sold off sharply on the news of US tariffs. As a global enterprise with a complex supply chain, GE Healthcare’s business can be harmed by escalating tariffs between the US and its trading partners. Moreover, as an iconic US brand in a high-tech sector that employs artificial intelligence, it is also at risk of being caught in the US/China policy crossfire. We think the market has overcorrected for this risk, and we are encouraged by management’s transparent guidance and firm grasp of the tariff impact. Over the long term, we think GEHC can grow revenue in low- to mid-single digits and improve its operating profit by several hundred basis points, thanks to its ongoing investments in product development and optimization of its product mix and cost structure.

Elevance Health

• Fair Value Estimate: $507.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

For long-term investors, Elevance ELV represents both a high-quality business and an attractive valuation in the managed care industry. First, Elevance is our favorite medical insurer, with deep local market share that helps solidify its cost advantage particularly in its employer plan stronghold. Second, the company’s limited exposure to Medicare and its fast-growing non-insurance businesses have limited its earnings contraction in recent years, distinguishing Elevance from most of its MCO peers. Finally, trading at only 12 times 2025 expected earnings with the potential to deliver double-digit earnings growth once it gets past growth headwinds in the individual exchanges (2026) and Medicaid (2027), we find Elevance shares attractive.

IQVIA Holdings

• Fair Value Estimate: $268.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

IQVIA’s IQV shares have been pressured by macroeconomic concerns and reduced biotech funding, leading customers to delay decisions and reprioritize drug programs. However, we view these issues as near-term headwinds, and IQVIA remains a global leader in providing clinical trial services and healthcare analytics to a diverse customer base. IQVIA’s backlog has expanded despite macroeconomic pressure, demonstrating its strength in booking new business. The firm’s extensive and proprietary data analytics capabilities, along with reinvestment in new technology (including artificial intelligence), support durable long-term growth.