PURPOSE: To evaluate the cost-effectiveness of axillary observation versus sentinel lymph node biopsy (SLNB) after negative axillary ultrasound (AUS). In patients with clinical T1-T2 N0 breast cancer and negative AUS, SLNB is the current standard of care for axillary staging. However, SLNB is costly, invasive, decreasing in importance for medical decision-making, and is not considered therapeutic. Observation alone is currently being evaluated in randomized clinical trials, and is thought to be non-inferior to SLNB for patients with negative AUS. METHODS: We performed cost-effectiveness analyses of observation versus SLNB after negative AUS in postmenopausal women with clinical T1-T2 N0, HR/HER2 breast cancer. Costs at the 2016 price level were evaluated from a third-party commercial payer perspective using the MarketScan® Database. We compared cost, quality-adjusted life years (QALYs), and net monetary benefit (NMB). Multiple sensitivity analyses varying baseline probabilities, costs, utilities, and willingness-to-pay thresholds were performed. RESULTS: Observation was superior to SLNB for patients with N0 and N1 disease, and for the entire patient population (NMB in US$: $655,659 for observation versus $641,778 for SLNB for the entire patient population). In the N0 and N1 groups, observation incurred lower cost and was associated with greater QALYs. SLNB was superior for patients with > 3 positive lymph nodes, representing approximately 5% of the population. Sensitivity analyses consistently demonstrated that observation is the optimal strategy for AUS-negative patients. CONCLUSION: Considering both cost and effectiveness, observation is superior to SLNB in postmenopausal women with cT1-T2 N0, HR/HER2 breast cancer and negative AUS.