Health Services

The Health Services sector encompasses businesses dedicated to healthcare-related products and services, accounting for over 18% of the U.S. GDP and approximately 10% of the S&P 500's market capitalization. It includes companies involved in manufacturing healthcare equipment and supplies, providing medical services, and offering health insurance.

The performance of the Health Services sector is influenced by economic, demographic, technological, and regulatory factors. The aging global population and rising chronic diseases fuel demand. Technological advancements, including digital health, telehealth, and AI, are transforming the sector. Evolving consumer expectations and regulatory changes like Medicare Advantage and value-based care impact the sector. Persistent workforce shortages necessitate innovative staffing strategies.

The Health Services sector includes healthcare providers and services, healthcare equipment and supplies, pharmaceuticals and biotechnology, health technology, and health insurance and PBM firms. Notable companies include UnitedHealth Group Inc., CVS Health Corp., McKesson Corp., Eli Lilly & Co., Johnson & Johnson, AbbVie Inc., Abbott Laboratories, and Merck & Co Inc., along with innovative companies like Intuitive Surgical Inc. and Teladoc Health.

The Health Services sector has experienced mixed performance recently, with variability in early 2025. Some reports indicated muted returns, while others noted a strong start to 2025. More recently, the healthcare sector was among the worst-performing sectors. The outlook remains largely positive, driven by long-term fundamentals. The aging U.S. population and chronic diseases are expected to continue driving demand. Innovation in biotechnology and AI is anticipated to be a key driver, with a growing focus on AI-based diagnostics and streamlined drug development. Regulatory tailwinds and attractive valuations suggest potential for recovery and growth.

Investing in the Health Services sector presents a unique risk/reward profile. The sector is often considered defensive due to the inelastic demand for healthcare services. Established companies generate substantial cash flows, supporting dividends. However, the sector faces volatility and risks, including drug development success, regulatory pressures, escalating costs, and disruptive technologies. Valuations have recently become more attractive, potentially offering a compelling entry point for investors. The Health Services sector can serve as both a defensive allocation and a growth opportunity.