Q1 Health Care Earnings Lag as Share Prices Rebound

Health care stocks have come back to life, rebounding from beaten-down valuations to outperform the S&P 500^® and half of its sectors over the past six months. But as another reporting season nears, health care earnings growth has yet to return to its historically strong level.

While first-quarter earnings estimates for the S&P 500 rose during the period, they fell for the health care sector. It is now expected to report declines in both earnings (–8.7%) and dollar earnings (–11.5%), according to FactSet.

That makes health care one of only two sectors predicted to report a year-over-year drop in earnings and marks the second-straight quarter in which the sector received the biggest or second-biggest downward revision during the quarter. But things aren't as bad as those numbers make it appear.

Over the long term, the sector is poised to benefit from durable structural demand, including an aging population beset with chronic diseases, technological innovations such as obesity drugs and artificial intelligence (AI), and a growing health consciousness among consumers.

In fact, this quarter's earnings drop is largely due to pharmaceutical drugmaker Merck (MRK) and its planned one-time charge of $9.2 billion related to its acquisition of Cidara Therapeutics. Without that, the sector would be expected to report earnings growth of 4.1%, still below the long-term average but up from a 2.8% decline the previous quarter, according to FactSet.

Valuations also remain attractive. As of early April 2026, health care and industrials are two sectors to earn a "most favored" rating from Charles Schwab. Health care also received the third-highest percentage (62%) of analyst "buy" ratings among the S&P's 11 sectors, according to FactSet.

It's not only Merck that's dragged down earnings estimates. Analysts have lowered their projections for two-thirds of the companies in the sector and did so by more than 10% for 12% of companies. Earnings in the pharma industry are expected to plunge 30% on an annual basis (Merck, again), while health care providers and services will fall 4%, according to FactSet. On the other side, analysts expect earnings to rise on an annual basis for biotechnology (12%), health care equipment and supplies (5%), and life sciences, tools, and services (3%).

As a new round of earnings reports gets underway, investors should examine company guidance for clues to risks and future opportunities. As always, prospects vary by industry and company.

U.S. spending on drugs is expected to grow 8% annually through 2028, driven by innovative treatments such as GLP-1 drugs and biologics, according to consulting firm McKinsey & Company. Eli Lilly (LLY) and Novo Nordisk (NVO) are well-positioned to benefit from their GLP-1 offerings, with Lilly leading the pack so far.

But many pharma companies face significant policy challenges, including Medicare negotiating steep discounts for certain drugs. The new lower prices for the first set of 10 drugs selected by Medicare for negotiation took effect January 1, 2026, with projected savings of about $6 billion versus 2023 prices, according to KFF. So far, Medicare said it will negotiate prices for at least 40 drugs that previously accounted for $125 billion in 2024 spending.

Drug companies must also grapple with the Trump administration's efforts to lower drug prices Americans pay, potentially to overseas levels. In early April 2026, the administration imposed new tariffs on some drugs and their active ingredients in a continuing effort to push companies to onshore production, although most big drugmakers already reached bilateral deals with the government on pricing, including tens of billions of dollars' worth of investments in U.S. production facilities.

Many pharma companies face a rapidly approaching "patent cliff," when a drug's patent expires and the market opens up to cheaper, generic versions. About $150 billion in annual revenues for large-cap pharma and biotech companies will go off patent by 2030, accounting for about 35% of their revenue, according to JPMorgan (JPM). Amgen (AMGN), Merck, and Bristol-Myers Squibb (BMY) will take the biggest hits, with more than half of their revenues exposed.

Pharma CEOs should have something to say during earnings calls about how they plan to address the patent cliff's impact on revenue, including the prospects for acquisitions to refill their pipelines. Dealmaking in the sector is already accelerating, with a surge of deals finalizing in the second half of 2025 and the first quarter of 2026, as companies look to buy into late-stage assets.

Insurers and health care providers face shrinking government spending on health care as a result of sweeping legislation passed last year that will cut about $1 trillion in federal health care spending over the next decade, mostly from Medicaid reimbursements. In addition, enhanced subsidies for the Affordable Care Act (ACA) expired at the end of 2025, which is expected to cause enrollment to decline, weighing on insurers' results. More than 1 million people had already dropped ACA-based coverage as of late January 2026.

Medicaid cuts will hit some providers but will help group insurance become a bright spot for payers, as disenrollment from Medicaid leads to an expected uptick of enrollment in employer-sponsored plans, according to McKinsey.

About 9 million people could disenroll from Medicaid as a result of the cuts, McKinsey predicted, with 1 to 2 million of them shifting to employer-sponsored insurance eventually. By 2029, group insurance will become the largest contributor to insurers' earnings before interest, taxes, depreciation, and amortization—accounting for $27 billion, triple the amount in 2024, according to McKinsey.

UnitedHealth (UNH), Centene (CNC), CVS Health (CVS), Elevance (ELV) (formerly Anthem), and Molina (MOH) together account for about half of Medicaid managed care enrollment in the United States. All have faced continued declines in Medicaid enrollment during the fourth quarter of 2025. Investors should look for guidance to the expected impact going forward and how these companies plan to adjust as government spending cuts take effect.

Non-acute care, especially outpatient services, offers a big growth opportunity, but health care providers face several financial headwinds. In addition to the Medicaid cuts, challenges include rising levels of uncompensated care, including care for the uninsured. This is expected to pressure margins as the number of uninsured rises and the labor market slowly deteriorates. A movement toward site neutrality, if it leads to legislative action, is also a risk.

Investors should monitor health care providers' guidance on plans to benefit from the growing adoption of AI to achieve efficiencies and cost savings.

Advances in technology, especially AI, are driving rapid growth in health services and technology, the fastest-growing segment in the health care sector. Generative AI is creating cost-saving opportunities across health care through automation and data connectivity as well as helping generate actionable insights. Meanwhile, robotics and other assistive technologies are streamlining workflows for clinicians and preventing burnout.

As for the tech companies, policy initiatives may offer additional opportunities. Federal programs, such as the Rural Health Transformation Program, are creating funding opportunities for technology use cases, including telehealth services and AI tools, according to McKinsey. Meanwhile, health care tech companies will continue to benefit as payers and providers seek ways to cut operating costs. Intuitive Surgical (ISRG), Veeva Systems (VEEV), and IQVIA (IQV) are bellwethers to watch.

For the major health care names reporting, analysts expect the following:

• UNH: Reporting April 21 before market open with an expected EPS of $6.60, –8.3% year over year, on revenue of $109.7 billion, +0.09% year over year
• Pfizer (PFE): Reporting May 5 before market open with an expected EPS of $0.72, –21.6% year over year, on revenue of $13.9 billion, +1.1% year over year
• MRK: Reporting April 30 before market open with an expected EPS of –$1.52, down from $2.22 a year earlier, on revenue of $15.9 billion, +2.3% year over year
• AMGN: Reporting April 30 after market close with an expected EPS of $4.75, –3.1% year over year, on revenue of $8.6 billion, +5.4% year over year
• LLY: Reporting April 30 before market open with an expected EPS of $7.19, +115.2% year over year, on revenue of $17.6 billion, +38% year over year
• AbbVie (ABBV): Reporting April 29 before market open with an expected EPS of $2.94, +19.3% year over year, on revenue of $14.7 billion, +10.3% year over year
• CNC: Reporting April 28 before market open with an expected EPS of $2.15, –25.8% year over year, on revenue of $47.6 billion, +2.1% year over year
• CVS: Reporting May 6 before market open with an expected EPS of $2.22, –1.3% year over year, on revenue of $95.1 billion, +0.5% year over year
• ELV: Reporting April 22 before market open with an expected EPS of $10.68, –10.8% year over year, on revenue of $48.4 billion, –1.1% year over year
• MOH: Reporting April 22 after market close with an expected EPS of $2.35, –61.4% year over year, on revenue of $10.9 billion, –2.7% year over year
• ISRG: Reporting April 21 after market close with an expected EPS of $2.10, +16% year over year, on revenue of $2.6 billion, +16% year over year
• VEEV: Reporting May 27 after market close with an expected EPS of $2.13, +8% year over year, on revenue of $853.6 million, +12.5% year over year
• IQV: Reporting May 6 before market open with an expected EPS of $2.82, +4.4% year over year, on revenue of $4.1 billion, +7.1% year over year

Note: Earnings and revenue estimates are as of April 9, 2026, and subject to change.