Morgan Stanley sees one beaten-down area of the stock market that could soon roar back to life

• Healthcare stocks could be poised to make a big comeback, Morgan Stanley says.

• Stocks in the sector have lagged behind the S&P 500, gaining just 4.8% for the year.

• But the bank thinks catalysts like AI and M&A activity could give the sector a fresh boost.

There’s a big opportunity in one area of the market for investors looking for a bargain: healthcare.

The sector looks poised to see a strong rebound despite a mixed performance so far in 2025, analysts at Morgan Stanley said in a recent episode on the bank’s “Thoughts on the Market” podcast.

That’s due to a handful of catalysts that could boost the beaten-down corner of the market, according to Sean Laaman, a US small- and mid-cap biotech analyst, and Terence Flynn, a US biopharma analyst, said.

Healthcare stocks have already gathered some momentum, despite an overall lagging performance so far this year. The iShares US Healthcare ETF climbed 2.9% over the month of October.

Healthcare stocks in the S&P 500, though, are up just 4.8% for the year, compared to the S&P 500’s 15.9% gain, according to data from Select Sector SPDRs.

There are a few reasons to think the uptrend will continue, Laaman and Flynn said. Here are some of the bullish factors they think could push the industry higher:

Insulation from tariffs. “A number” of firms in the biopharma and biotech space have announced significant investments in US manufacturing in a broader attempt to reshore supply chains. That could make the industry less exposed to tariffs, Flynn suggested.

Eli Lilly, for instance, said in early 2025 it would spend $27 billion to build new manufacturing plants in the US

AstraZeneca also said in July that it would plough $50 billion to invest in manufacturing and research & development in the US.

More clarity around drug pricing. President Trump signed an executive order this year that promised to slash prices of some prescription drugs by as much as 80%.

Investors have been concerned over how the initiative will play out in the sector, but have gotten more clarity recently, Flynn said, pointing to some firms, like Pfizer and AstraZeneca, that have reached an agreement with the administration on the matter.

“We’re watching to see if additional agreements get announced,” he added.

Wave of deal activity. There’s around $177 billion worth of patents that are set to expire in the large-cap biopharma space by the end of the decade, Laaman said.

When the industry sees a big wave of expiring patents, that can put pressure on some companies to “continue to progress,” and be at the front of the competition by striking merger & acquisition deals, Flynn said.

Dealmaking in the healthcare sector saw a sharp decline over the first half of 2025, but there are some signs a rebound is already underway. M&A activity in the space rose 7% over the third quarter, according to data from the healthcare intelligence firm LevinPro HC.

AI catalysts. The use of artificial intelligence could boost the healthcare sector in a few ways, Laaman said. He pointed to benefits like potentially faster recruitment for healthcare trials, or firms being able to file regulatory submissions faster.

Stocks in the sector are cheap. When looking at the price-to-earnings multiple of companies, the healthcare sector is trading at about a 30% discount to the broader S&P 500, Flynn estimated.

“Positioning to me still feels light here,” he added of investment flowing into the sector.

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