JPMorgan expects the healthcare sector to see net income rise by 22% next year after a decline of 1% in 2026.
Investors are ignoring healthcare stocks, and it comes as the sector's earnings are about to be a major driver of growth for the S&P 500, according to JPMorgan.
Over the past three years, traders have been largely focused on artificial intelligence and other related technology companies, "leaving one of the market's largest and most durable growth sectors increasingly overlooked," strategists at the investment bank, led by Dubravko Lakos-Bujas, wrote in a note on Tuesday, referring to healthcare.
They outlined how its valuations remain favorable compared to the rest of the market, because of its low pricing and expected earnings growth.
The sector's earnings growth is predicted to reverse from a decline of 1% this year to gains of over 22% in 2027, which would make the industry one of the main contributors to the S&P 500's SPX profit growth aside from tech names, the strategists said.
"Despite this improving outlook, healthcare continues to trade at a meaningful discount to the broader market," they added.
JPMorgan found that the U.S. healthcare sector has lagged behind the S&P 500 every year since the ChatGPT artificial intelligence model was first launched almost four years ago.
Sentiment started to sour toward healthcare during discussions on drug pricing reform in the U.S., like the Inflation Reduction Act of 2022, which aims to improve the affordability of medication, the strategists noted.
Healthcare stocks were also hit by cuts to Medicaid, reimbursement constraints and policy uncertainty, particularly regarding President Donald Trump's tariffs and the potential impact of sweeping spending cuts by the Department of Government Efficiency, they said.
JPMorgan recommends stocks in the biopharmaceutical sector, with Eli Lilly $(LLY)$, Gilead Sciences (GILD) and AbbVie $(ABBV)$ as top picks, and those in the medical technology or life science tools industry, such as Danaher Corporation $(DHR)$ and Thermo Fisher Scientific $(TMO)$, citing improving financial fundamentals and attractive valuations.
One of the issues that could possibly threaten the bank's bullish thesis is the "patent cliff" approaching in 2028, where a number of major drugs are facing patent expirations. Continued reforms to drug pricing, debates around the funding of Medicaid, changes to reimbursements and tariffs also pose risks to the sector, the strategists said.
"That said, we believe many of these concerns are already reflected in valuations, investor positioning and ownership levels, limiting potential downside relative to history," they wrote.
-Nora Redmond