Looking beyond post-election volatility in healthcare

A sharp selloff in technology and artificial intelligence (AI)-related stocks in the aftermath of the U.S. midterm elections spilled over to healthcare and other sectors on November 5, with biotechnology stocks particularly hard hit. Notably, the decline was most acute among genomics, diagnostics, and life science tools companies that had benefited from growing AI enthusiasm, which, in our view, had pushed expectations and valuations for some of these companies to increasingly stretched levels.

We believe recent price action reflects broader deleveraging dynamics and other technical factors rather than a deterioration in fundamentals across the biotech landscape.

Pullback in AI-linked biotech stocks could refocus attention on fundamentals

In recent months, surging interest in AI-enabled drug development and personalized medicine had created a widening disconnect within the sector (Exhibit 1). While AI-linked life science tools stocks rallied sharply through September, many more traditional biotech companies, including those advancing promising new treatments, continued to trade at attractive valuations. We believe the recent volatility since early October could help refocus investor attention on fundamentals and the attractive entry points in these high-quality biotech companies.

Importantly, while the biotech sector’s strong run over the past year may draw comparisons to the speculative froth that preceded the Covid-era downturn in 2021, today’s biotech landscape bears several key differences.

For one, having endured the post-pandemic drawdown and tighter financing conditions that accompanied the Fed’s aggressive 2022-2023 rate-hike cycle, we believe biotech has emerged as a healthier and more disciplined sector. Many companies have stronger balance sheets, more experienced management teams, and a greater number of commercial-stage assets than was the case several years ago. In addition, whereas the 2020-2021 boom was broad-based, the valuation excess in today’s market has been largely concentrated in a relatively narrow group of companies. Meanwhile, we continue to find attractive valuations among many companies with validated platforms, commercial products, and late-stage assets.

A more nuanced policy outlook for healthcare

Beyond biotech, the extent of the Democratic sweep and what it could mean for the policy outlook for healthcare warrants attention. However, we believe the implications are more nuanced and potentially more benign for parts of the sector than the initial market reaction suggested. It also remains too early to draw conclusions about how a Democratic-led Congress will engage with the Trump Administration or what ultimately could translate into healthcare policy.

What does appear clearer to us is that Democrats may be emboldened to shift the policy agenda toward expanding access and protecting healthcare coverage, with Affordable Care Act (ACA) affordability near the top of the list.

Enhanced premium subsidies expired at the end of 2025, raising concerns about affordability and coverage losses. Democrats are widely expected to prioritize restoring those subsidies while also turning their attention to protecting existing Medicaid coverage rather than pursuing another major expansion. For Medicaid specifically, much of the debate has centered on concerns around new federal work requirements that could lead to coverage losses, particularly among lower-income populations.

The upshot is that greater coverage stability could be incrementally supportive for overall healthcare utilization and patient volumes. For medtech in particular, this would be a welcome potential tailwind following a challenging operating environment marked by strained hospital budgets and coverage losses, which have helped push valuations to historically depressed levels.

As for biopharma, while drug pricing will likely remain a hot-button issue, we would not necessarily interpret the Democratic sweep as signaling a push for new legislation. Instead, we believe Democrats are more likely to defend existing Medicare drug-price negotiation and other affordability provisions enacted under the Inflation Reduction Act. That could provide some reassurance for pharmaceutical and biotech companies, where policy uncertainty around drug pricing has periodically weighed on valuations.

Ultimately, while we will continue to monitor the shifting policy landscape in the months ahead, we remain encouraged by the strong fundamental backdrop across the sector. In our view, Healthcare continues to offer investors a unique combination of long-term secular tailwinds, such as medical innovation and aging demographics, alongside defensive characteristics and a diverse set of return drivers beyond the AI theme. We also believe the recent market volatility could refocus attention on valuations, where we continue to see opportunities for investors willing to look past near-term market gyrations.

IMPORTANT INFORMATION

Artificial intelligence (“AI”) focused companies, including those that develop or utilize AI technologies, may face rapid product obsolescence, intense competition, and increased regulatory scrutiny. These companies often rely heavily on intellectual property, invest significantly in research and development, and depend on maintaining and growing consumer demand. Their securities may be more volatile than those of companies offering more established technologies and may be affected by risks tied to the use of AI in business operations, including legal liability or reputational harm.

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.

Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.