Pharma stocks and the wider health care sector are the odd group out in the 2026 bull market. Health Care is the only one of the eleven S&P 500 sectors reporting a year-over-year decline in second-quarter earnings, in a season where the index as a whole is growing earnings 50.4% [3], and the sector returned just 3.5% in the first half against 10.2% for the index [4]. The valuation has adjusted: DataPorium's Healthcare sector P/E stands at 22.1 as of August 28, 2026, down from 23.4 in late June [5]. Under the sector average, the picture is split between companies with large new products, such as Eli Lilly (LLY), which grew revenue 48% in the quarter, and companies absorbing patent expirations and acquisition charges, such as Merck (MRK) [1][2].
Why pharma stocks have lagged the market in 2026
The sector's earnings problem is not a demand problem. It is a mix of three things: price erosion on established drugs, large one-time charges tied to acquisitions of pipeline assets, and the loss of exclusivity on several of the largest products of the last decade. FactSet's August 7 update, with the season most of the way complete, lists Health Care as the only sector with declining year-over-year earnings while ten sectors grow and eight grow at double-digit rates [3]. When a sector's earnings fall while the index's earnings rise more than 30% excluding one-time gains [3], its relative multiple has to compress or its price has to fall. In the first half it was mostly the price: the sector ranked eighth of eleven with a 3.5% return, ahead of only Communication Services, Consumer Discretionary and Financials [4].
The trailing multiple has followed. DataPorium's sector P/E series for Nasdaq-listed health care companies moved from 23.4 on June 26 to 23.9 on July 7, 22.5 on August 12 and 22.1 on August 28, 2026 [5]. On the same date Technology traded at 44.2, Utilities at 28.2, Financial Services at 20.4 and Energy at 16.7 [5]. Health care is now priced close to the market's non-technology average, which is a long way from the premium it carried during the pandemic years. The series can be followed on DataPorium's stock market page [5].
Lilly: the growth exception
Eli Lilly's second quarter, reported August 5, shows what the sector's earnings would look like without the drag from older products. Revenue rose 48% to $23.0 billion, driven by a 60% increase in volume that was partly offset by a 13% decline in realized prices [1]. Mounjaro revenue was $9.9 billion, up 91%, and U.S. Zepbound revenue was $4.9 billion, up 44% [1]. International revenue rose 80% to $8.6 billion as Mounjaro launched in more markets, and U.S. revenue rose 33% to $14.4 billion [1]. Reported EPS rose 26% to $7.94 and non-GAAP EPS rose 33% to $8.38, on a non-GAAP gross margin of 86.3% [1].
Lilly raised its 2026 revenue guidance to $85.0 billion to $87.0 billion from $82 billion to $85 billion and set non-GAAP EPS guidance at $35.50 to $36.50 after acquired research and development charges [1]. Research and development spending rose 14% to $3.8 billion, or 17% of revenue [1]. The 13% price decline is the number to watch: it shows that even the fastest-growing franchise in the industry is giving back price as competition and payer pressure build, and that the growth is coming from volume.
Merck: guidance up, earnings down
Merck's quarter, reported August 4, illustrates the other side. Worldwide sales rose 5% to $16.6 billion, with Keytruda and its subcutaneous version Keytruda Qlex at $8.4 billion, up 5%, including $463 million from Qlex [2]. Winrevair, the pulmonary arterial hypertension drug, grew 75% to $588 million, and Gardasil rose 4% to $1.17 billion [2]. Merck raised and narrowed its 2026 sales guidance to $66.3 billion to $67.3 billion from $65.8 billion to $67.0 billion [2].
Yet Merck reported a GAAP loss of $0.54 per share and a non-GAAP loss of $0.13 per share, because the quarter included a charge of $2.31 per share for the acquisition of Terns Pharmaceuticals, and it cut its 2026 non-GAAP EPS guidance to $2.66 to $2.76 from $5.04 to $5.16 to reflect that charge [2]. This is the pattern that shows up in the sector's aggregate earnings: companies facing patent expirations later in the decade are buying pipeline assets now, and accounting rules push those purchases straight through the income statement. The reported decline in sector earnings overstates the decline in operating cash generation.
Pipeline catalysts into 2027
Obesity and diabetes
Lilly said it has submitted orforglipron, its oral GLP-1, for approval in type 2 diabetes, and that the clinical data package for retatrutide is now complete across obesity, obstructive sleep apnea and knee osteoarthritis, with a biologics license application planned for the first quarter of 2027 [1]. An oral obesity drug would widen the market beyond patients willing to inject, and retatrutide's trial results have set a higher bar on weight loss. Both are 2027 revenue events with 2026 stock price implications.
Cardiology, oncology and infectious disease
Merck received FDA approval for Lipfendra, the first once-daily oral PCSK9 inhibitor for cholesterol, and announced positive Phase 3 results for an investigational once-weekly HIV regimen combining islatravir with lenacapavir [2]. Keytruda Qlex is converting patients to a subcutaneous form that extends the franchise as the intravenous product approaches the end of its exclusivity [2]. Investors may consider that these catalysts are the reason the sector's multiple has not fallen further: the earnings are depressed by charges for assets whose value is only beginning to show up in sales. Points to weigh:
- Health Care is the only S&P 500 sector with falling Q2 2026 earnings, and it returned 3.5% in the first half versus 10.2% for the index [3][4].
- The sector's trailing P/E has compressed to 22.1, close to the non-technology market average [5].
- Lilly's 48% revenue growth and raised guidance to $85 billion to $87 billion show the growth is concentrated in a few franchises [1].
- Merck's $2.31 per share acquisition charge shows how pipeline purchases depress reported earnings without changing sales trends [2].
Pharma stocks have reset to a market multiple because reported earnings are falling, but the decline is concentrated in acquisition charges and legacy price erosion while the largest new products keep growing at double-digit rates.
Key takeaways
- Health Care is the only S&P 500 sector reporting a year-over-year earnings decline for Q2 2026, in a season where index earnings grew 50.4% [3].
- The sector returned 3.5% in the first half of 2026 and its trailing P/E fell to 22.1 by August 28 from 23.4 in late June [4][5].
- Lilly grew revenue 48% to $23.0 billion, with Mounjaro up 91%, and raised 2026 revenue guidance to $85 to $87 billion [1].
- Merck raised sales guidance to $66.3 to $67.3 billion but cut EPS guidance to $2.66 to $2.76 after a $2.31 per share acquisition charge [2].
- Key 2027 catalysts include Lilly's retatrutide filing and orforglipron approval decision and Merck's Lipfendra launch [1][2].
Frequently asked questions
Why are healthcare stocks underperforming in 2026?
Health Care is the only S&P 500 sector with declining Q2 2026 earnings, weighed down by price erosion on older drugs and large acquisition charges, and it returned 3.5% in the first half against 10.2% for the index [3][4].
How did Eli Lilly do in Q2 2026?
Revenue rose 48% to $23.0 billion, Mounjaro sales rose 91% to $9.9 billion, non-GAAP EPS rose 33% to $8.38, and 2026 revenue guidance was raised to $85.0 to $87.0 billion [1].
Why did Merck report a loss in Q2 2026?
Merck booked a $2.31 per share charge for its acquisition of Terns Pharmaceuticals, producing a GAAP loss of $0.54 per share even though sales rose 5% to $16.6 billion and full-year sales guidance was raised [2].
What is the P/E ratio of the healthcare sector in 2026?
DataPorium's Healthcare sector P/E for Nasdaq-listed companies was 22.1 on August 28, 2026, down from 23.4 on June 26, compared with 44.2 for Technology [5].
Sources & References
- [1] Lilly reports second-quarter 2026 financial results (SEC Form 8-K exhibit, August 5, 2026)
- [2] Merck Announces Second-Quarter 2026 Financial Results (August 4, 2026)
- [3] FactSet Insight: S&P 500 Earnings Season Update, August 7, 2026
- [4] RBC Wealth Management: First-half 2026 equity recap (July 1, 2026)
- [5] DataPorium Stock Market Analytics (Healthcare sector P/E)
