Healthcare and Energy: The Market’s Standout Sectors in 2025

In a year marked by market volatility and uncertainty, two sectors have emerged as clear winners in 2025: healthcare and energy. While the broader market has struggled to find direction amid tariff tensions and economic concerns, these defensive sectors have delivered impressive returns, offering investors both growth and relative stability. This comprehensive analysis examines why healthcare and energy stocks are outperforming, which companies are leading the charge, and what investors should consider when allocating to these sectors in the current environment.

Market Performance: The Numbers Tell the Story

The contrast between these standout sectors and the broader market is striking. According to recent data:

• The Energy Select Sector SPDR ETF (XLE) is up approximately 8.0% year-to-date in 2025
• The Health Care Select Sector SPDR ETF (XLV) has gained about 7.5% during the same period
• Meanwhile, the S&P 500 has posted modest gains of just 1.4%, with some analyses even showing the broader market down 3.5% for the year

This outperformance is particularly notable given that technology stocks, which led the market in previous years, have faltered in 2025, with the Technology Select Sector SPDR ETF (XLK) down approximately 8.0% year-to-date.

Healthcare Sector: Finding Strength in Uncertainty

Why Healthcare is Outperforming

Healthcare’s strong performance in 2025 can be attributed to several key factors:

1. Defensive Characteristics: As economic uncertainty has increased, investors have gravitated toward healthcare’s defensive qualities. “Healthcare is always a defensive area because we continue to need care regardless of what the economy is doing,” notes a Morningstar director of healthcare equity research.
2. Attractive Valuations: After multiple years of sluggish performance while investors focused elsewhere, healthcare stocks entered 2025 with relatively attractive valuations, offering a potential entry point to a sector with profound long-term drivers.
3. Strong Earnings and Guidance: Many healthcare companies, particularly in the biopharma space, reported robust fourth-quarter results for 2024 and provided optimistic outlooks for 2025, driving investor confidence.
4. Innovation Renaissance: The sector has been prolifically innovating in recent years, with dramatic breakthroughs in biotechnology that could be game changers in the coming years. Specialty drugs, which typically target complex or rare conditions, are showing particularly promising clinical data.
5. Policy Tailwinds: After facing headwinds in 2024 related to policy uncertainties, some of these concerns have abated with the change in administration, though challenges like drug pricing pressures persist.

Subsector Performance and Standout Companies

Not all healthcare subsectors are performing equally well in 2025:

• Pharmaceuticals: This group has generally performed well, with CVS Health Corporation emerging as a standout performer, up nearly 42% year-to-date. The company received a significant boost after its most recent earnings report exceeded expectations.
• Biotechnology: After years of underperformance, biotech firms are reporting encouraging clinical data in blockbuster categories. The decrease in genome sequencing costs, expansion of cell-based therapies, and accelerated pace of drug discovery are supporting this subsector.
• Medical Devices: Companies like Boston Scientific have performed well, benefiting from the increase in elective procedures as patients catch up on surgeries delayed during the pandemic.
• Managed Care: This subsector has faced challenges, with UnitedHealth Group under investigation for some of its billing practices, causing its shares to pull back. The segment has been weighed down by increased healthcare utilization and concerns about Medicare Advantage reimbursement rates.

Energy Sector: Resilience Amid Supply Constraints

Why Energy is Outperforming

The energy sector’s strong performance in 2025 is driven by several fundamental factors:

1. Supportive Oil Price Environment: Crude oil prices have remained in a historically elevated range between $66 and $87 per barrel, allowing most oil producers to maintain strong profitability. Analysts expect prices to remain in the $70 to $90 per barrel range throughout 2025.
2. Constrained Global Supply: Several factors are limiting oil supply growth:
   • Maturing US shale drilling fields
   • OPEC production restraint, particularly from Saudi Arabia
   • Underinvestment in production capacity over the past several years
3. Steadily Growing Global Demand: Despite concerns about economic growth, global oil demand continues to increase, creating a favorable supply-demand balance.
4. Elevated Geopolitical Risks: Ongoing conflicts in the Middle East and Ukraine have maintained a risk premium in oil prices, benefiting energy companies.
5. Attractive Valuations and Dividends: Many energy companies offer compelling valuations and high dividend yields compared to other sectors.

Subsector Performance and Key Players

Within the energy sector, performance varies by subsector:

• Integrated Oil Majors: Companies like Exxon Mobil have performed well, benefiting from their diversified operations across the energy value chain. Exxon Mobil represents over 25% of the Fidelity Select Energy Portfolio.
• Oil and Gas Equipment and Services: This subsector shows particularly strong prospects as energy producers boost investment in production. After years of reduced headcount and capacity, these companies now have solid pricing power and high profit margins as demand for their expertise increases.
• International and Offshore Producers: With US shale growth slowing, international and offshore oil production is seeing increased investment, benefiting companies focused on these areas.
• Natural Gas: The outlook for US natural gas producers has improved with the lifting of the moratorium on new US liquified natural gas facilities, which could significantly boost demand later this decade.

Investment Strategies: Navigating the Two Leading Sectors

For investors looking to capitalize on the strength of healthcare and energy stocks, several strategies warrant consideration:

Portfolio Allocation Considerations

1. Defensive Positioning: Both sectors can provide defensive characteristics in a portfolio, though in different ways. Healthcare tends to be less economically sensitive, while energy can offer inflation protection.
2. Diversification Benefits: Including both sectors can enhance portfolio diversification, as they often respond differently to economic and market conditions.
3. Balancing Growth and Value: Healthcare offers a mix of growth (biotechnology, medical technology) and value (pharmaceuticals, insurers), while energy tends to be more value-oriented with higher dividend yields.

Healthcare-Specific Strategies

1. Focus on Innovation Leaders: Companies developing breakthrough treatments in areas like obesity, diabetes, oncology, and rare diseases offer significant growth potential.
2. Consider Specialty Pharma: Specialty drugs targeting complex conditions represent a growing segment with strong pricing power and less competition.
3. Watch for M&A Opportunities: The healthcare sector often sees consolidation, which can create investment opportunities in potential acquisition targets.
4. Monitor Policy Developments: Healthcare remains sensitive to policy changes, so staying informed about regulatory developments is crucial.

Energy-Specific Strategies

1. Emphasize Companies with Strong Balance Sheets: Energy price volatility can stress weaker companies, making financial strength an important criterion.
2. Look for Disciplined Capital Allocation: The best energy investments tend to be companies that maintain capital discipline rather than aggressively expanding production.
3. Consider Equipment and Services Exposure: This subsector may offer the strongest growth prospects as capital investment in energy production increases.
4. Don’t Ignore the Energy Transition: Even while investing in traditional energy, consider companies that are also positioning themselves for the long-term energy transition.

Risks and Challenges to Monitor

Despite their strong performance, both sectors face potential headwinds that investors should monitor:

Healthcare Sector Risks

1. Drug Pricing Pressure: Ongoing efforts to control healthcare costs could impact pharmaceutical and biotech company profits.
2. Regulatory Uncertainty: Healthcare remains heavily regulated, and policy changes can significantly impact various subsectors.
3. Innovation Disappointments: Clinical trial failures can lead to significant stock price declines, particularly for biotech companies.
4. Utilization Normalization: The post-pandemic surge in healthcare utilization may eventually normalize, potentially impacting service providers and insurers.

Energy Sector Risks

1. Oil Price Volatility: Energy stocks remain sensitive to oil price fluctuations, which can be driven by geopolitical events, economic data, or OPEC decisions.
2. Recession Concerns: A significant economic downturn could reduce global energy demand and pressure the sector.
3. Long-term Energy Transition: While not an immediate threat, the gradual shift toward renewable energy sources represents a long-term structural challenge.
4. Policy Changes: Energy policy can shift with administrations, potentially impacting regulations, permits, and subsidies.

Outlook for the Remainder of 2025

Looking ahead, both healthcare and energy sectors appear well-positioned to maintain their leadership positions for the remainder of 2025:

Healthcare Outlook

The fundamental drivers supporting healthcare stocks remain intact. Innovation continues at a rapid pace, valuations remain reasonable despite recent gains, and the sector’s defensive characteristics should remain attractive in an uncertain economic environment. Particular strength may continue in areas with breakthrough innovations, such as weight loss and diabetes treatments, oncology, and rare disease therapies.

Energy Outlook

The supportive environment for oil prices is likely to persist through 2025, with global supply remaining constrained and demand continuing to grow. The energy equipment and services subsector appears particularly well-positioned as capital investment in production increases. While trading may remain somewhat choppy and range-bound, the sector’s strong fundamentals and attractive dividends should continue to draw investor interest.

Conclusion: A Tale of Two Defensive Winners

In a market environment characterized by uncertainty and volatility, healthcare and energy have emerged as the standout sectors of 2025. Both offer investors a combination of growth potential and defensive characteristics, though through different mechanisms. Healthcare provides essential services regardless of economic conditions and benefits from continuous innovation, while energy is supported by favorable supply-demand dynamics and offers inflation protection.

For investors seeking to navigate the challenging market environment of 2025, a strategic allocation to these two leading sectors may provide both offensive and defensive benefits to a well-diversified portfolio. By understanding the unique drivers of each sector and the varying prospects of their component industries, investors can position themselves to capitalize on the continued outperformance of healthcare and energy stocks.

Sources: Fidelity Investments Sector Outlooks, Yahoo Finance, Investing.com, Morningstar Research (Data as of April 11, 2025)