Healthcare Stocks Offer Opportunities

The entire space has been struggling, from pharmaceutical companies to hospitals

- David Wainer

Donald Trump's election win prompted even more bullishness in a stock market. For healthcare investors, it represented yet another reason to dump some stock.

Trump's appointment of industry skeptics like Robert F. Kennedy Jr., alongside expectations of a Republican crackdown on programs like Medicaid and Obamacare, has prompted a selloff in everything from hospitals to pharmaceuticals, health insurers and biotech.

The election jitters exacerbated what had been a tough period for the industry. In 2023, healthcare underperformed the S&P 500 by about 22 percentage points, so many believed that 2024 would be a bounce-back year.

Instead, history repeated itself, with yet another 20-percentagepoint underperformance for healthcare. That created a valuation gap that looks like a historic aberration: The Health Care Select Sector ETF is trading at a discount of more than 20% to the S&P 500 based on their forward earnings multiples, far larger than the average 5% discount seen over the past two decades, according to FactSet.

The market bearishness is partly due to fundamentals. At a time when the U.S. economy is on solid footing and tech companies are riding high on the artificial intelligence frenzy, most healthcare subsectors seem to be caught in a negative earnings-revision cycle, writes Asad Haider, a healthcare equity strategist at Goldman Sachs.

The reasons are idiosyncratic.