Rising Health Care Stocks Face Q4 Earnings Test

Investors showed little love for the health care sector for most of 2025, with the sector falling to long-term lows versus the S&P 500^® index (SPX). That changed late in the year, as numerous AI use cases emerged, policy risk in the pharmaceutical industry weakened, and earnings estimates broke out to the upside after drifting sideways for about three years.

Suddenly, the sector ranks as one of S&P's strongest. Almost three-fourths of companies traded above their 50-day average as of mid-January, while valuations remain below the SPX as a whole.

In short, the sector is seeing renewed interest. It's expected to post year-over-year earnings growth for the fourth quarter of 2025, according to FactSet. That includes all five sector industries: providers and services; equipment and supplies; pharmaceuticals; life sciences, tools and services; and biotech.

But the projected earnings growth in dollar terms has fallen over the past three months, by the second-steepest amount of all 11 sectors in the S&P 500, to growth of only 0.2% year over year, according to FactSet. Analysts have cut estimates for more than half of the index's 60 health care companies, with Pfizer (PFE), Merck (MRK), and Gilead Sciences (GILD) suffering the biggest cuts.

As a new round of earnings reports gets underway, investors should examine company guidance for clues to risks and future opportunities in addition to the numbers. While the health care sector has rallied into earnings season, it still has a lot to prove. And as always, prospects vary by industry and company, and policy remains a key risk for many.

Pharmaceuticals

In early January, drugmakers AbbVie (ABBV) and Johnson & Johnson (JNJ) reached agreements with the Trump administration to lower costs of certain medicines, primarily via the TrumpRX program and Medicaid, as part of the administration's push to cut drug prices for U.S. consumers.

AbbVie and Johnson & Johnson were among the last big pharma firms to make deals with the administration. Analysts say the results are turning out to be less costly than feared just six months ago, after President Trump moderated his stance on the issue. But while the risk appears to be fading, it's not gone entirely, as the White House looks to address voters' concerns over affordability ahead of midterm elections this year.

That policy uncertainty had weighed on valuations, and its lessening should clear the way for prices to rise. Even with that overhang, though, drugmakers outperformed the broader market last year as companies began to see some of their growth potential materialize. The pharma industry is expected to report year-over-year earnings growth of 6% for the fourth quarter, according to FactSet.

While profitability is under pressure, the market is growing. U.S. spending on drugs is surging, especially for innovative therapies, such as biologics and GLP-1 drugs. Total U.S. gross spending on pharmaceuticals is projected to grow 8% annually from 2024 – 2028, according to consulting firm McKinsey & Company, putting Eli Lilly (LLY), Amgen (AMGN), and Novo Nordisk (NVO) in a strong position to benefit from their GLP-1 offerings.

Nearing a potential "patent cliff"

One looming challenge is that many big pharma companies are facing a patent cliff. About $150 billion in annual revenues will go "off patent" by 2030, representing an average of about a third of each company's revenue, according to JPMorgan (JPM). Amgen, Merck, and Bristol-Myers Squibb (BMY) face the biggest declines—products that accounted for more than half of their 2025 revenue will be affected.

Pharma CEOs should have something to say about how they plan to address the patent cliff's impact on revenue, including the prospects for acquisitions to refill their pipelines. Dealmaking in the sector is already accelerating.

Payers and Providers

Both health care providers and insurers face a shifting landscape after Congress passed sweeping legislation in 2025 that will cut $1 trillion in federal health care spending over the next decade, most of it in the form of Medicaid reimbursements. In addition, Congress allowed enhanced subsidies for Affordable Care Act plans to expire at the end of 2025, which will likely cause enrollment to fall.

Insurers

The Medicaid cuts will hit some providers but will help group insurance become a bright spot for payers, as disenrollment from Medicaid leads to an expected uptick of enrollment in employer-sponsored plans, according to McKinsey.

About 9 million people could disenroll from Medicaid as a result of the cuts, McKinsey predicted, with 1 to 2 million of them shifting to employer-sponsored insurance eventually. By 2029, group insurance will become the largest contributor to insurers' earnings before interest, taxes, depreciation, and amortization—accounting for $27 billion, triple the amount in 2024, McKinsey said.

Meanwhile, insurers in the ACA marketplace will likely face eroding margins after the enhanced subsidies expired at the end of 2025.

Providers

Non-acute care, especially outpatient services, offers a big growth opportunity, but health care providers face several financial headwinds. In addition to the Medicaid cuts, challenges include rising levels of uncompensated care, including care for the uninsured. This is expected to pressure margins as the number of uninsured rises and the labor market slowly deteriorates. A movement toward site neutrality, if it leads to legislative action, is also a risk.

Investors should monitor health care providers' guidance on plans to benefit from growing adoption of AI to achieve efficiencies and cost savings.

The providers and services industry is expected to report the highest revenue growth (10% year over year) among the five health care industries, according to FactSet, as utilization continues to improve. HCA Healthcare (HCA) is a key reference source for information on uncompensated care and reimbursement concerns.

Health services and technology

Advances in technology, especially AI, are driving rapid growth in health services and technology, the fastest-growing segment in the health care sector. Generative AI is creating cost-saving opportunities across health care through automation and data connectivity as well as helping generate actionable insights. Meanwhile, robotics and other assistive technologies are streamlining workflows for clinicians and preventing burnout.

As for the tech companies, policy initiatives may offer opportunities. Federal programs, such as the Rural Health Transformation Program, are creating funding opportunities for technology use cases, such as telehealth services and AI tools, according to McKinsey. Meanwhile, health care tech companies will continue to benefit as payers and providers seek ways to cut operating costs.

Investors will want to hear what business leaders have to say about strategies for leveraging AI and other tech to improve performance.

Bottom line

An aging population beset with chronic diseases provides lasting structural demand for the healthcare sector, while innovations such as obesity drugs and AI-driven efficiencies should help drive growth. But the sector's revenue is increasingly tied to government funding, which brings heightened policy risk. Investors should keep an eye out for evidence of stabilized earnings, cost management trends and AI-driven efficiencies, rising debt owed to providers, and drug-pipeline catalysts.

For the major health care names reporting, analysts expect the following:

UNH: Reporting January 27 before market open. EPS of $2.10, –69.1% year over year, on revenue of $113.8 billion, +12.9% year over year.

PFE: Reporting February 3 before market open. EPS of $0.57, –9.5% year over year, on revenue of $17.0 billion, –4.5% year over year.

MRK: Reporting February 3 before market open. EPS of $2.01, +17.1% year over year, on revenue of $16.2 billion, +3.6% year over year.

AMGN: Reporting February 3 after market close. EPS of $4.71, –11.2% year over year, on revenue of $9.5 billion, +4.0% year over year.

LLY: Reporting February 4 before market open. EPS of $7.06, +32.7% year over year, on revenue of $17.9 billion, +32.6% year over year.

ABBV: Reporting February 4 before market open. EPS of $2.65, +22.6% year over year, on revenue of $16.4 billion, +8.7% year over year.

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