What Are the Catalysts Driving the Surge in AI Healthcare Stocks?

TradingKey - The healthcare sector is experiencing a resurgence in 2025 after two years of underperformance, primarily driven by advancements in artificial intelligence (AI). The healthcare industry gained significant attention following the announcement of the Stargate project, raising expectations for further breakthroughs as technology evolves.

AI-related healthcare stocks have seen remarkable gains year-to-date. HIMS has surged 173%, while precision medicine firm Tempus AI (TEM) has jumped 150%. AI drug development company Absci Corp (ABSI) has risen over 106%, and Guardant Health (GH) has increased more than 54%. 

Rising Interest from Big Tech

Recent announcements indicate a growing interest in AI applications within healthcare. Firefly Neuroscience (AIFF) recently revealed its plan to join NVIDIA's (NVDA) Connect program, aimed at using AI to improve the diagnosis and treatment of brain disorders. Following this announcement, AIFF's stock has soared nearly fourfold. The company's FDA-approved BNA system leverages specialized brain activity data to assess brain age, potentially transforming approaches to diseases like Alzheimer's.

Moreover, AMD plans to invest $20 million in Absci to enhance the use of its AI chips in drug development. AMD's CEO, Sean McClain, emphasized the need for significant computational power in AI-driven drug development and highlighted potential cost reductions in inference processes.

Additionally, the emergence of platforms like Deep Seek is enabling smaller companies to adopt AI technologies. Open-source solutions allow underfunded healthcare firms—particularly those specializing in chronic disease management and healthcare data analytics—to leverage AI capabilities.

Large Market Potential for AI in Healthcare

According to Precedence Research, the global AI market in healthcare is projected to reach $26.69 billion by 2024 and expand to approximately $613.81 billion by 2034, translating to a compound annual growth rate of 36.83%. 

The JP Morgan Healthcare Conference underscored the increasing importance of AI in drug development. Recent FDA guidelines acknowledge AI's critical role in enabling effective drug development strategies.

Goldman Sachs Bullish on Healthcare IT

Goldman Sachs has released a report on the Healthcare IT (HCIT) and digital health sectors, indicating a normalization of the operational environment post-pandemic. The adoption rates for virtual care and digital health have stabilized, presenting a more predictable growth trajectory.

Notably, the HCIT sector faces less regulatory risk compared to other healthcare areas. Government regulations do not directly control medical device prices, which mitigates potential policy impacts. This resilience also applies to HCIT, where many revenues are service-based and less exposed to tariff policy.

The upcoming Healthcare Information and Management Systems Society (HIMSS) Annual Conference, scheduled for March 3-6, 2025, is anticipated to generate new insights, technologies, and collaborative opportunities within the industry.

Healthcare Opportunities from Macro Factors and Low Valuations

The 'Magnificent Seven' in technology have lost their shine this year, and Trump's tariff policies have heightened market uncertainty.In times of market volatility or economic uncertainty, investors often seek defensive stocks, with consumer staples and healthcare considered safer options.

Fund managers have shifted their focus to other sectors. According to data from Bank of America, U.S. bank stocks attracted nearly $2 billion in inflows as of early February, marking the second-largest weekly inflow since 2008. Healthcare companies, European stocks, and gold have emerged as key beneficiaries of this shift in investors' allocation strategies.

Furthermore, healthcare stocks are positioned attractively based on valuation. MacroMicro data indicates that the average forward P/E ratio for the S&P 500 was 22.64 as of February, compared to just 17.79 for the healthcare sector.

Source: MacroMicro

Tempus AI Attracts Institutional Investment

Cathie Wood from ARK Investment Management has spotlighted healthcare as an overlooked investment opportunity amid the AI boom. ARK has aggressively increased its holdings in Tempus AI, raising its position by 132% to $186.3 million in Q3. Additionally, JPMorgan boosted its stake by 1.65 million shares, with both Goldman Sachs and Morgan Stanley reporting increases of 129% and 40%, respectively. Notably, around 70 other funds have also made substantial investments in Tempus AI.

Furthermore, political figures such as Nancy Pelosi have shown support for Tempus AI, purchasing options on January 14, which contributed to a more than 40% increase in the stock price over two days.

Here Are AI Healthcare Stocks to Watch

• Multi-Omics Sequencing     

Tempus AI (TEM): AI + Precision Medicine

Beam Therapeutics (BEAM): AI + Gene Editing Technology

• Drug Development and Discovery      

Tempus AI (TEM): AI + Precision Medicine

Beam Therapeutics (BEAM): AI + Gene Editing Technology

• Early Disease Detection        

Guardant Health (GH): AI Liquid Biopsy & Early Cancer Screening

Avant Technologies (AVAI): AI Early Disease Detection

• Automation in Healthcare and Intelligent Robotics  

Intuitive Surgical (ISRG): Surgical Robotics

Vicarious Surgical (RBOT): Surgical Robotics

• Virtual Healthcare and Remote Monitoring      

Teladoc Health (TDOC): Virtual Healthcare Service Provider

Hims & Hers Health (HIMS): Telemedicine Platform

• Additional Healthcare Services   

Butterfly Network (BFLY): Medical Education and Skills Training

Doximity (DOCS): AI Medical Professional Social Platform