Healthcare: Increased Clarity on Drug Pricing and Tariffs Led to a Rebound in Q1

The Morningstar Healthcare Index underperformed the Morningstar US Market Index in the first three quarters of 2025, due to uncertainty around US drug pricing policy and healthcare tariffs. While healthcare narrowed the performance gap in the fourth quarter, partly due to clarity on US drug pricing policy and a three-year reprieve from the biopharma tariff, trailing 12-month healthcare performance still lags the market. We still see potential for solid healthcare performance in 2026, driven by its defensive profile and innovation, as well as growing evidence that healthcare is a net beneficiary of advances in artificial intelligence.

The sector looks undervalued overall, with a 0.93 market-cap-weighted price/fair value estimate ratio as of March 23. Medical distribution stands out as the most overvalued industry, while healthcare plans and devices look the most undervalued.

Volatility has remained elevated following the election of Donald Trump as US president and Robert F. Kennedy Jr.’s appointment as secretary of Health and 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 2026. As the market assigns winners and losers in the age of artificial intelligence, we think healthcare is well-positioned. Most firms are likely to see incremental operational benefits from incorporating AI, and some industries (like biopharma) could see broader benefits.

Artificial Intelligence Can Shorten the Long Road to Market for Pharmaceuticals

AI stories have dominated broader market sentiment lately, and we think one of the clearest beneficiaries in healthcare is biopharma. The use of artificial intelligence could drastically reduce the time it takes to bring new pharmaceuticals to market. By improving drug discovery, clinical trial design, and regulatory processes, AI can shorten the overall timeline from 14 years to just six to nine years. AI’s ability to optimize compound screening, select suitable clinical trial participants, and streamline submission processes helps accelerate each stage.

Top Healthcare Sector Picks

GE Healthcare

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

We attribute the recent selloff in GE Healthcare GEHC shares to the conflict in the Middle East and higher oil prices. The firm’s top line has very little exposure to this region (perhaps a low-single-digit percentage of revenue), but oil prices can pressure its margins due to higher transportation costs. We note that GE Healthcare has an excellent track record of responding to supply chain shocks, including during the covid-19 pandemic, and we think shares are already pricing in a bearish scenario. However, we acknowledge that sentiment can drive shares even lower and expect volatility as long as oil prices remain elevated.

Elevance

• Fair Value Estimate: $474.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Elevance ELV represents both a high-quality managed care organization and an attractive valuation. First, Elevance is our favorite medical insurer, with deep local market share that helps solidify its advantages in its employer-plan stronghold. Second, recent margin troughs in its at-risk businesses, particularly Medicaid, represent both a near-term concern and a long-term opportunity. Once it gets past regulatory headwinds through 2027, we think Elevance’s profits could rise materially. Finally, with shares trading at less than 12 times deflated 2026 earnings, Elevance appears highly 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, which have contributed to more selective R&D spending and longer decision cycles, combined with broader market concerns about AI-driven disruption. However, we view these issues as near-term headwinds. IQVIA remains a global leader in clinical trial services and healthcare analytics, with a growing backlog that highlights its strength in booking new business. Its differentiated data assets and expanding AI capabilities position it to harness rather than be displaced by AI over time, supporting durable long-term growth.