Sentiment, defensive qualities, and resilience against political risk has helped buoy sector, says CIO
With US politics driving investor sentiment into extremely negative territory and prompting a full-blown market correction, observers might be surprised to see one sector that often carries political risk riding relatively high year to date. Since the start of 2025 the S&P 500 is down around two per cent. The NADSAQ 100 is down around four per cent. The MSCI US Health Care Index is up over six per cent since the start of the year.
For a sector that often faces the ire of US politicians and is currently grappling with a Secretary of Health and Human Services in Robert F. Kennedy Jr. who appears willing to upend some of the traditional order, the relative outperformance of this sector might be surprising to some. Paul MacDonald is less surprised. The CIO and Portfolio Manager at Harvest ETFs, responsible for one of Canada’s largest health care ETFs by AUM, explains, that a mixture of investment principles and sector and company fundamentals are driving health care now.
“You’ve got this really uncertain outlook driven by policy and tariffs, but health care is always in the limelight of politics, but when you look fundamentally it does have defensive characteristics and it has lagged the market in recent years,” MacDonald says. “So having an environment where there’s greater uncertainty and a bit of a rotation happening, I think it should be unsurprising that health care is doing relatively well.”
On a macro level, MacDonald explains, the threat and uncertainty around tariffs and US trade policy has prompted a significant downturn in investor sentiment. That has, in turn, resulted in a significant pullback among the momentum names and market leaders for the past two years — which have largely been mega-cap tech stocks.
Beyond just a rotation to more value and defensive names, MacDonald notes that the policy and political risks facing US health care are already quite well known. The appointment of RFK Jr. as HHS secretary may have prompted some consternation, but MacDonald notes that he has toned down his anti-vaccine rhetoric since taking office and has focused more on food additives than healthcare. MacDonald notes, too, the diversity of the US health care system and highlights that a slight headwind for vaccine manufacturers doesn’t necessarily mean a headwind for the whole sector.
Looking at the macro picture, MacDonald is also quick to highlight that current economic data in the US remains relatively strong, despite poor sentiment. Because of that divergence, MacDonald believes health care’s status as a superior good with inelastic demand makes it more appealing to investors who feel that weak sentiment but remain aware of stronger underlying numbers. Moreover, if weakness does emerge in the US economy MacDonald argues that most health care companies will continue to see demand.
The real risk to macroeconomic confidence, MacDonald explains, lies in the ongoing uncertainty about US trade and economic policy. The tariff story that has dominated in 2025 has been one of vacillation between more and less aggressive stances. Tariffs appear set one day, only to be largely lifted the next. Markets remain volatile while that uncertainty persists and MacDonald notes that economic decision making can become more conservative in this environment, which could slow growth significantly.
This is where MacDonald believes health care stocks can play a role for client portfolios. He argues against panicked decisions and rapid re-allocations, but notes that investors and advisors might want to look for tweaks and small changes that can be made to their portfolios to weather the current storms. He sees health care’s relative stability and strength so far this year as attractive.
Because so much of today’s volatility appears to be sentiment and politics driven, there is greater capacity for things to turn rapidly. While a sudden resurgence in growth appetites might not be as constructive for health care, MacDonald notes that the sector has tended to offer relatively low market correlations in any environment. Certain health care subsectors like medical devices can enjoy a bit of a growth bias, while other subsectors remain in a more traditional defensive category. Diversification across sectors and subsectors is key to navigating an uncertain market, MacDonald argues.
Amid an environment of heightened sentiment, ratcheted up tensions, and market volatility MacDonald notes that it can be easy for investors to make emotional decisions or jump to what they consider a ‘port in the storm.’ He believes, however, that advisors can help make appropriate tweaks while maintaining the rational view that will help their clients best.
“Keep emotions in check and make sure that the plans are still on target. Maybe there's some tweaks to be done here. Maybe there's some profit taking in some areas, and a bit of a rebalance. Not a bad time to be to be doing that,” MacDonald says. “But for most, I think the key is to not get overly emotional with this narrative that is dominating our dinner conversations and the hockey dressing room.”
