Is it a good time to invest in healthcare stocks?
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Healthcare: the sickly patient in the waiting room
It’s been a frustrating couple of years for investors in healthcare stocks. The halo effect of Covid vaccines has long faded and the GLP-1 weight-loss story seems to be steadily running out of steam. With the Magnificent Seven stealing the limelight, it’s been hard to entice investors into seemingly waning narratives - sentiment is poor and outflows from healthcare ETFs have been considerable. The popular sector proxy, Select Sector SPDR Healthcare ETF (XLV), saw $7.4bn in outflows in 2024, with the index consistently underperforming the S&P 500 Index since 2022.
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More recently, the sector has taken a hit as investors move to the side lines while they try to understand the US administration’s plans and general uncertainty around its healthcare policies and regulations. The threat of tariffs has weighed on the sector even more since April. All of this has conspired to push sector valuations to a roughly 20% discount to the overall market.
A pretty bleak picture all round but the market might just be focusing too hard on the headlines and not enough on what’s happening in the sector itself.
Healthcare earnings aren’t actually that painful
With so much bad sentiment baked into outlooks, 90% of the S&P 500’s healthcare companies beat earnings estimates in the first quarter of the year. That’s the highest proportion of prediction-topping results in any sector over the period. Granted, the numbers landed before Liberation Day upset the party but, with 50% of firms issuing positive guidance (higher than a lot of other sector cousins), the general story might not be as bad as it seems.
Healthcare’s healing but policy uncertainty is a big headache
On the ground, margin pressures have held back profits, with labour shortages and higher inflation hitting firms, along with existing contracts preventing companies from raising prices to combat their effects. Contract renewals are now coming through though, giving the sector room to lift pricing and ease pressures elsewhere.
And, while the President has called for lower drug prices within the past few weeks, the shares of Eli Lilly, GSK and Pfizer recovered quickly from reactionary share price drops. That could be a sign that this is yet another TACO time (“Trump always chickens out”, an acronym coined by the Financial Times) or that it might be too difficult to force the sector to instantly slice prices.
The looming threat of tariffs is still hanging over the sector, and is a very real risk to supply, pricing and production chains but it’s likely the market has already factored in these scenarios. If international negotiations provide a glimmer of hope, it could signal the passing of peak policy fear and allow investors to look past the macro picture towards a sector that seemingly offers a lot of sound balance sheets and relatively consistent earnings growth.
Why now might be the right time to invest in healthcare stocks
If you can look past the near-term quagmire, there might just be an opportunity to tap into some longer-term trends at a sector forward price-to-earnings (P/E) ratio below its 10-year average.
The developed world is dealing with ageing populations, with the WHO expecting 1.4bn people aged over 60 by 2030, reaching 2.1bn by 2050, up from 1bn in 2019. [1] This shift will likely raise the need for chronic disease management, more assisted living spaces, higher pharmaceutical product volumes and greater national infrastructure to serve more people.
Even before we get there, we are likely to see innovation and technological transformation improve the sector’s reach, earnings growth and pipelines. GLP-1 weight-loss drugs gave the sector a shot in the arm and, while smaller players may try to battle the likes of Novo Nordisk on this front, others are already targeting breakthroughs in immunotherapy, gene editing and AI-powered diagnostics. Digital health platforms, originally given a boost by the pandemic, are now unlocking ways to efficiently handle patient volumes and are becoming embedded in many hospitals and GP surgeries.
The point here is that concentrating on near-term uncertainty may be useful but only when it doesn’t obscure the bigger themes already developing. It may be that the sector ends up suffering from strict government policies and blunt tariffs but, as firms innovate and restructure, we may look back on the current environment as a value opportunity for select, nimble firms with longer-term visions.
Sources:
[1] World Health Organization: Ageing
Important information
When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.
Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.
