It wasn’t supposed to turn out this way. Hillary Clinton was supposed to be bad for health care stocks, while Donald Trump was supposed to be good for them.

He won, she lost, and so did health care stocks. The S&P 500 Health Care stock price index was expected to bounce back from its miserable year and end 2016 with a bang.

Well, the bang was short-lived. After a brief celebration, the Health Care sector relapsed to end the year down 4.4% compared to the 9.5% rise in the S&P 500 (Fig. 9).

After Election Day, investors may have taken a second look at what President-elect Donald Trump said about the drug industry during the course of the campaign. In the past, he has proposed opening the US market to low-cost drug imports.

Another Trump idea: Having Medicare directly negotiate drug prices. And, in an interview that was part of Time magazine’s “Person of the Year” 12/7 article, Trump said, “I’m going to bring down drug prices. … I don’t like what has happened with drug prices.”

And just like that, the industry’s faint glimmer of hope was snuffed out. The S&P Health Care sector has had two tough years, gaining only 0.6% over 2015 and 2016, making it the second-worst-performing sector over that two-year period. After such a dismal performance, the sector has the third-lowest forward P/E of the 11 S&P 500 sectors. At 14.4 as of December 29, Health Care’s P/E is almost three percentage points lower than that of the S&P 500 and only slightly ahead of Financials’ (14.1) and Telecom’s (14.2) (Fig. 10).

Health Care’s share of S&P 500 earnings also is almost three percentage points more than its capitalization share in the S&P 500 (Fig. 11). The recent underperformance follows a four-year period, from 2011 through 2014, when the sector did extraordinarily well, gaining 117.1%. Over those four years, Health Care was the top-performing sector, far outperforming the S&P 500’s 63.7% return over the same period. A similar run in the late 1990s was followed by 10 years of consolidation. Has enough time passed for the industry to make a comeback? Much will depend on the policies coming out of the White House.

Here’s a look at four of the industries driving the sector’s performance:

(1) Evil drug empire. The pharmaceutical industry has been tarred and feathered for much of the past two years for seeming to raise drug prices arbitrarily. Valeant Pharmaceuticals and Turing Pharmaceuticals (led by maniacal Martin Shkreli) may have been the poster children for bad behavior, but the problem is that even “traditional” drug companies have been hiking prices to bolster profits. As a result, the industry has become a punching bag for politicians, and its reputation has been badly bruised.

The S&P 500 Pharmaceuticals industry index fell 4.0% last year. It is up 3.7% since the election, but lagging the S&P 500’s 5.5% gain. The S&P 500 Biotechnology industry index fared even worse, with a 14.4% drop in 2016 as a whole and gaining only 4.2% since Trump got the nod (Fig. 12 and Fig. 13). The industries’ valuations have shrunk as well. The forward P/E for the Pharma industry stands at 14.6, down from 17.7 in March 2015, and the forward P/E in Biotech has fallen 6.1 percentage points since March 2015 to 11.8 (Fig. 14 and Fig. 15).

Why is the industry raising prices so dramatically? Perhaps it’s because new drug approvals are down sharply. Only 22 new drugs cleared the FDA last year, the lowest number since 2010 and less than half the 45 approved in 2015, a 1/2 Reuters article reported. “The slowdown suggests the pharmaceuticals industry may be returning to more normal productivity levels after a spike in approvals in 2014 and 2015, when the haul of new drugs reaching the market hit a 19-year high,” the article explained. Due to the dry spell, returns on R&D investment at pharma companies fell to 3.7% in 2016 from a high of 10.1% in 2010.

Ironically, this dry spell could bode well for small biotech companies if it reignites M&A. Transactions were in short supply last year. There were 326 deals in 2016, the lowest number in six years, a 1/3 Bloomberg article reported. Last year’s deals were valued at about $91 billion, down from $118 billion the year prior. One deal in 2016--Shire’s purchase of Baxalta--represented more than a third of the total.

“There’s plenty of firepower to get deals done. The 14 biopharma firms with the most cash had more than $220 billion in liquid assets on hand at the end of the third quarter and can raise plenty more in debt on top of that. Sluggish near-term sales growth adds to the motivation for many firms to act,” the Bloomberg article stated. “More of that cash will likely be unlocked if and when the Trump administration makes it cheaper to repatriate cash held overseas. Johnson & Johnson, Amgen Inc., and Gilead Sciences Inc. have the most M&A-friendly combination of cash and back-of-the-pack sales growth. But there are many other contenders.”

(2) Distributing losses. Health Care Distributors were the worst-performing industry within the S&P 500 Health Care sector last year, down 22.1%, but they’ve rebounded 10.9% since the presidential election (Fig. 16). Earnings have flat-lined over the past year, and analysts have scrambled to reduce their net earnings estimates (Fig. 17 and Fig. 18). Not surprisingly, the industry’s forward earnings multiple has fallen to 13.0, from a high of 19.6 in early 2015, leaving it closer to the bottom than the top of its 10-year P/E range of 10-20 (Fig. 19).

As branded and generic drug prices come under pressure, distributors get squeezed. An 10/31WSJ article explains it well: “Cardinal and other distributors act as middlemen between drug makers and pharmacies. Their contracts with branded pharmaceutical companies often allow them to benefit from rising drug prices. As some branded drug makers rein in price increases, that benefit to distributors gets squeezed. … Cardinal now expects generic drug prices to fall in the mid-to-high single digits in the current fiscal year, compared with its earlier expectation a mid-single digit decrease. It also expects branded drug manufacturer prices to increase 7% to 9% in the year, down from 10% previously.” As a result, the company reduced its 2016 earnings estimate to between $5.40 and $5.60 per share, down from $5.48-$5.73.

(3) Tech disappoints. The S&P 500 Health Care Technology industry index is also in the sick bay after falling 21.3% last year and remaining under pressure since the election (Fig. 20). The industry has one stock, Cerner, which sells and services software and systems to hospitals, clinics, physician practices, labs, and pharmacies. The company, which acquired Siemens Health Services in 2015 for $1.3 billion, missed analysts’ forecasts in 2016, but is still growing quickly. A Cerner press release laid out a revenue growth target of roughly 11% in 2017 y/y and an earnings-per-share goal of $2.50-$2.70, with the midpoint equating to 13% y/y growth. At the time that the company gave its forecast, analysts were calling for $2.69 a share in earnings. Earnings disappointments have taken a toll on the company’s forward P/E, which has shrunk to a recent 18.5 from a high of 33.6 in January 2015 (Fig. 21).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.