Pfizer Tariff Reprieve Gives Healthcare a Shot in the Arm

Jeff Buchbinder | Chief Equity Strategist

Last Updated: October 09, 2025

Additional content provided by John Lohse, CFA, Research.

The Deal

Last week, pharmaceutical giant Pfizer (PFE), struck a deal with the Trump administration to lower prescription drug prices offered through Medicaid in exchange for a three-year protection from tariffs on pharmaceutical products. The deal, which centers around drug prices being offered at the so-called “most-favored-nation” (MFN) status, means pricing won’t exceed the lowest prices charged in other developed countries. In addition, the drugmaker agreed to apply favorable pricing on sales via a new federal government sponsored website, “TrumpRX”. The new website, targeted for launch in early 2026, will send consumers who don’t use insurance straight to the drug manufacturers’ websites where they’ll receive direct-to-consumer prices. According to Pfizer, the discounted pricing will apply to a “large majority” of primary care drugs in addition to some specialty drugs, with savings ranging as high as 85% and on average 50%. In addition to the pricing concessions, Pfizer also agreed to commit to invest $70 billion in research and development and manufacturing within the U.S. to help reshore drug manufacturing.

Investment Implications

Critics of the agreement point to ambiguity over how much already-reduced Medicaid prices will fall and how, if at all, insured Americans can benefit from the favorable direct-to-consumer pricing. The investment implication here is that this move signals clarity on pharmaceutical tariff uncertainties. Earlier this year, the administration threatened a 100% tariff on any “branded or patented pharmaceutical product” citing potential justification under national security concerns over the importation of drugs and pharmaceutical ingredients. Pharmaceutical tariffs were a major fear and one of the last big pieces of the Trump administration’s tariff-centric trade policy to be settled. This deal sets a framework for other drug companies to ensure tariff reprieves, if they follow in a similar fashion. In total, 17 companies were warned by the White House this summer to work collaboratively on drug price reductions or face the threat of elevated levies. Those companies, some of which include giants like Eli Lilly (LLY), Johnson & Johnson (JNJ), Merck & Co. (MRK) and AbbVie (ABBV), make up a large portion of the healthcare sector. If industry tariffs are manageable, it would allow for salient forecasting and more confidence in the deployment of capital. That’s a good thing.

What We’re Noticing

Last week, the S&P 500 Healthcare Sector Index gained 6.9% in large part due to this well-received agreement. Technically, there’s promising progress for the sector as noted in “The Technical Analysis Picture for Healthcare Is Improving” chart. We’ve seen constructive price action and momentum with the sector reversing a downtrend and recapturing its 200-day moving average (dma) (top panel). Breadth has been in an uptrend, with 60% of the sector’s constituents now trading above their 200-dma, marking a year-to-date high (bottom panel). That’s still less than the broader market, but directionally, it is trending in the right direction. We’d like to see stronger relative strength versus the S&P 500 (middle panel), which is trying to break out of a downtrend that’s become entrenched for more than two and a half years.

The Technical Analysis Picture for Healthcare Is Improving

Source: LPL Financial, Bloomberg 10/07/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Fundamentally, on the surface, healthcare seems like a compelling sector from a growth at a reasonable price perspective. The bar for third quarter earnings growth is low, as estimates have come down by more than 7% since June 30, implying no earnings growth at all in the quarter. However, the current consensus for 2026 earnings growth is greater than 10%.

From a policy perspective, as evidenced by the recent Pfizer agreement, there are unique regulatory considerations in healthcare that should be considered. Health Secretary Robert F. Kennedy, Jr. is limiting growth opportunities for vaccine manufacturers. The One Big Beautiful Bill Act (OBBBA) includes reductions in Medicaid funding. Meanwhile, the impending expiration of Affordable Care Act (ACA) subsidies — originally introduced during the COVID-19 pandemic — is a major sticking point in the current government shutdown negotiations.

The relatively less economic sensitivity of the healthcare sector is another important consideration for investors. A rotation into defensive sectors appears overdue, as they've largely been overlooked since the S&P 500 bottomed in April. While any shift that might occur could be short-lived — perhaps lasting only a month or two — and could take some time to materialize, it's likely that these sectors will eventually attract more investor interest, especially if enthusiasm around the AI trade begins to fade.

Conclusion

Tactically, LPL Research has a neutral view on the healthcare sector. Beneath the surface of the sector, on an industry level, the technical outlook has been mixed with pharmaceuticals and biotech showing progress, while healthcare providers need to show further signs of strength, and medical devices have been trending lower. As always, our Strategic and Tactical Asset Allocation Committee (STAAC) continues to monitor changes in the relative attractiveness of the healthcare sector, looking for continued notable technical progress and material fundamental changes as third quarter earnings season approaches.

We currently hold an overweight stance on large caps and an underweight view on small caps, on a tactical time frame. Within sectors, we’re favorable on communication services and financials, but are underweight on materials and utilities.