5 Healthcare Plays Powering the Sector's Big Comeback

After years of underperformance, the healthcare sector may finally be waking up. The Health Care Select Sector SPDR Fund (NYSEARCA: XLV), which tracks the largest U.S. healthcare companies, has returned just 7% over the past three years and 8.5% over the last five years, lagging behind the broader market. Even this year, XLV is up only 5.2% year-to-date, once again lagging the S&P 500.

But a new wave of catalysts could change that narrative. Between the prospect of lower interest rates, a significant policy breakthrough on drug pricing, and renewed investor appetite for defensive, high-yielding sectors, healthcare may be positioned for a long-awaited turnaround.

Lower rates tend to favor dividend-paying and defensive names. As borrowing costs fall, capital flows back toward stable, income-generating assets, precisely the kind of companies that dominate the healthcare landscape. With policy relief and improving fundamentals across the board, the setup for a sector-wide rebound looks increasingly compelling.

And this time, the spark came from a headline that few saw coming.

A Policy Breakthrough Ignites the Sector

Healthcare stocks roared higher after President Donald Trump and Pfizer announced a landmark deal to lower prescription drug prices under Medicaid in exchange for tariff relief.

Investors cheered the agreement, which was seen as more balanced than punitive. In response, XLV surged over 5% in just two sessions, marking its best two-day performance since November 2020, when optimism about the vaccine first lifted the sector.

The new Most-Favored-Nation (MFN) pricing framework ties U.S. Medicaid drug prices to the lowest paid by other developed nations. It’s a historic move designed to lower costs for patients without crushing pharmaceutical margins. In exchange for a three-year exemption from tariffs, Pfizer agreed to extend MFN pricing to all U.S. Medicaid programs, provide up to 80% discounts on select medications, repatriate foreign profits, and invest roughly $70 billion into expanding U.S. manufacturing capacity. The company also joined TrumpRx.gov, a new federal platform designed to provide Americans with direct access to lower-cost medications.

The deal brings much-needed clarity after years of regulatory uncertainty and may pave the way for similar agreements with other major players. What was once seen as a looming policy risk could now evolve into a manageable, growth-friendly framework.

Amid this optimism, several healthcare names have emerged as both high-yield opportunities and long-term value plays for investors betting on a sustained recovery.

Pfizer: Momentum Reignited in a Long-Time Laggard

Pfizer Inc. (NYSE: PFE) was the clear winner of the week, with shares soaring more than 15% following the announcement. That’s their strongest weekly performance in years. After spending much of 2024 and early 2025 stuck near multi-year lows, the stock is finally showing signs of life.

In Q2 2025, Pfizer exceeded both revenue and earnings estimates, reporting earnings per share of 78 cents, surpassing expectations of 58 cents. Revenue climbed 10.3% year-over-year to $14.65 billion, also ahead of forecasts.

At current levels, the stock offers one of the most compelling value propositions among large-cap pharmaceutical companies. With a forward P/E ratio of just 8.7 and a dividend yield of 6.25%, it combines deep value with reliable income, a potent mix in an evolving rate environment.

After years of stagnation, this new policy breakthrough and improving earnings trajectory may have reignited momentum for Pfizer and the broader healthcare space.

Eli Lilly: A Long-Term Leader Setting Up for Another Breakout

Eli Lilly and Company (NYSE: LLY) remains the sector’s growth powerhouse, even as it briefly lagged broader market gains this year. The stock is up 8.7% year-to-date, but its longer-term record is extraordinary. A 151% gain over the past three years, fueled by blockbuster demand for its diabetes and obesity treatments.

Technically, Lilly’s setup looks bullish. After a 16% surge last week, shares are consolidating just below the key $900 resistance level. A decisive move above that mark could confirm a breakout and continuation of its long-term uptrend, following a sustained healthy pullback for much of the year.

While the dividend yield of 0.71% is modest, Lilly’s strength lies in consistency, innovation, and execution. Analysts maintain a Moderate Buy rating, with a consensus target suggesting over 11% upside from current levels. For investors seeking dependable growth in a sector known for defensive income, Lilly stands out as a potential leader built for the next phase of the healthcare cycle.

UnitedHealth Group: Rebounding Strongly After a Steep Slide

UnitedHealth’s recovery has been sharp and decisive. After a difficult start to the year, UnitedHealth Group Incorporated (NYSE: UNH) has rebounded more than 50% from its 52-week low, driven by renewed institutional interest and a notable vote of confidence from Warren Buffett’s Berkshire Hathaway.

Despite still being in the red year-to-date, UnitedHealth’s technicals have improved dramatically. The stock has broken its downtrend, established higher lows, and continues to regain momentum. With strong margins, steady growth, and a dividend yield of 2.45%, the company remains a cornerstone in the healthcare insurance space.

As investors shift back toward stability and yield, UnitedHealth is well-positioned to become one of the leaders in the sector’s next leg higher.

Merck: Value, Yield, and a Breakout in the Making

Merck & Co., Inc. (NYSE: MRK) is showing renewed strength after months of consolidation. The stock rallied 13.5% last week, breaking above a multi-month base and reclaiming key resistance near $85,  a potential signal that a trend reversal is underway.

In its second quarter, Merck delivered EPS of $2.13, beating estimates by 10 cents, on revenue of $15.81 billion. Though revenue was slightly below forecasts, the results reaffirmed the company’s earnings resilience and operational consistency.

With a forward P/E of just 9.27 and a dividend yield of 3.6%, Merck offers both value and income. Analysts anticipate a nearly 20% upside from current levels, with a consensus target price of $106.41. If shares can maintain momentum above $90, the stock could confirm a long-term bottom and extend its recovery into 2026.

The Healthcare Sector ETF: XLV’s Bullish Reversal Gains Steam

For those seeking broad exposure, the Health Care Select Sector SPDR Fund (NYSEARCA: XLV) remains the most efficient way to play the recovery theme. The ETF, with a 1.68% dividend yield, provides diversified access to sector leaders, including Eli Lilly, Johnson & Johnson, UnitedHealth, Merck, Amgen, Pfizer, and AbbVie.

Last week, XLV closed up nearly 7%, breaking above its 200-day moving average, a strong technical confirmation that sector momentum is shifting. On a longer-term monthly chart, XLV has now confirmed a higher low near $130, setting the stage for a potential retest of resistance around $150.

If the ETF can hold above that level, a move toward its all-time high near $160 looks increasingly likely. For investors seeking a balance between value, growth, and income, XLV offers a straightforward and diversified approach to capturing the potential turning point in the sector.

Healthcare Enters New Stage of Strength

After years of lagging behind the broader market, healthcare might be entering a new phase of strength. Falling interest rates, a more constructive policy backdrop, and improving fundamentals across major players are combining to reignite investor interest.

Pfizer’s deal may have been the immediate spark, but the broader takeaway is clear: sentiment toward healthcare stocks has shifted. What was once viewed as a politically burdened, slow-growth sector is now reemerging as a value-driven, income-generating opportunity with real upside potential.

For investors seeking to position themselves ahead of a potential multi-year recovery, Pfizer, Merck, and UnitedHealth stand out for their value and yield, while Eli Lilly offers growth leadership. And for those who prefer simplicity and diversification, XLV remains the go-to vehicle to capture the sector’s resurgence.

After years in the shadows, healthcare might finally be ready to challenge for leadership, and for long-term investors, that makes now a potentially opportune time to buy and hold.

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