Morgan Stanley sees one beaten-down area of the stock market that could soon roar back to life

Core Viewpoint - The healthcare sector is expected to rebound strongly, presenting investment opportunities despite a mixed performance in 2025 [1] Group 1: Market Performance - Healthcare stocks have shown some momentum, with the iShares US Healthcare ETF increasing by 2.9% in October [2] - Year-to-date, healthcare stocks in the S&P 500 have risen by 4.8%, significantly lower than the S&P 500's overall gain of 15.9% [2] Group 2: Catalysts for Growth - Insulation from tariffs is anticipated as several biopharma and biotech firms are investing in US manufacturing to reshore supply chains, reducing tariff exposure [2] - Eli Lilly plans to invest $27 billion in new US manufacturing plants, while AstraZeneca has committed $50 billion to manufacturing and R&D in the US [3] - Increased clarity around drug pricing has emerged, with President Trump signing an executive order aimed at reducing some prescription drug prices by up to 80% [3][4] - Companies like Pfizer and AstraZeneca have reached agreements with the administration regarding drug pricing, which may alleviate investor concerns [4] Group 3: M&A Activity - A significant wave of deal activity is expected, with approximately $177 billion worth of patents set to expire in the large-cap biopharma sector by the end of the decade [4][5] - The expiration of patents may pressure companies to pursue mergers and acquisitions to maintain competitive positioning [5] - The potential for AI and M&A activity is seen as a fresh boost for the healthcare sector [6]