Having Missed the ’23 Rally, Healthcare Remains "On Sale"
What happened last week?
- The S&P 500 rose 1.84%
- The Dow Jones gained 0.34%
- The Nasdaq advanced 3.04%
The Q4 earnings season kicked off with the big banks on Friday with more earnings reports scheduled for release in the days and weeks ahead. Investors will pay special attention to management color on company-specific outlooks during the earnings calls. We expect earnings growth of 5% in 2024 to be followed by 7% growth in 2025.
3 Things to Know
Healthcare: From Laggard to Leader in a Matter of Weeks
From just two weeks into 2024, the healthcare sector has shrugged off “laggard” title from 2023. In contrast to the anemic 0.3% ’23 return vs. 24.2% for the S&P 500, healthcare now leads the performance chart among all sectors year-to-date, boasting a 3.0% return vs 0.3% for the S&P 500.
Early indicators of market activity are setting the stage for a broader sector recovery this year, especially in areas that were most beaten down in 2023.
As we noted in our Wealth Outlook 2024, tighter financial conditions, regulatory uncertainties, the glut of inventories post-COVID and investor fear that GLP drugs (medications utilized in the treatment of type 2 diabetes and obesity) will permanently impair the need for other healthcare have been the key culprits behind a rare earnings recession in healthcare over the past decades.
Both large and small company valuations have suffered equally these past two years. In our view, cash-rich, cheaply-valued companies that facilitate drug research and development, save costs and improve patient outcomes look like a potentially safer way to play the Healthcare sector’s convalescence.
New Drugs to Fuel Healthcare Performance
Even a revolution in weight loss won’t threaten the unstoppable trends associated with longevity and healthcare. Since 2018, we’ve been highlighting the favorable demographic tailwinds underpinning the global healthcare sector.
Despite an ever-changing market, we all share the inevitable journey of aging. The world is aging, and in the developed market populations are aging even faster. An inevitable corollary of an aging population is the growing share of total consumption going to healthcare.
Historically, this growth combined with the defensive properties of healthcare made it a secular growth component of portfolios. We believe it is the second most compelling industry investment sector along next to Information Technology.
In 2023, the healthcare sector experienced a mirror of the broader market, with most of the gains concentrated in a few mega-winners and the rest struggled amidst an unusual profit recession. We are firm believers in the transformative value of innovation (for lives and portfolios).
Recent breakthroughs in treating obesity are being received by the market as being truly revolutionary.
Treating obesity is an example of how healthcare can change rapidly. With a new generation of weight-loss medications (GLP-1 drugs), we are already seeing reports of lower rates of diabetes, heart disease and associated co-morbidities among their growing user base.
Taken to an extreme, this could mean less healthcare spending on treating co-morbidities. But these medicines do not make people younger.
In fact, a decrease in the rate of obesity-related deaths will be exactly offset by increases in other causes of death, while allowing many people to live longer and increase overall healthcare consumption as they do so.
This was on clear display through the middle of the 20th century when breakthroughs in vaccinations and antibiotics prevented countless premature deaths but drove up the rate at which people died from age-related maladies.
This illustrates the aging dynamic that has powered higher aggregate spending on healthcare for generations.
The Industry Is an Unstoppable Trend
At this point, we believe investors should reflect on the inherent resilience of healthcare over the long term: the sector recorded positive earnings growth during all three recent global earnings recessions.
As macro tides shift, we see healthcare as an unstoppable trend beneficiary, with growth prospects well beyond the anti-obesity drugmakers.
Ultimately, the new generation of GLP-1 drugs are not substitutes for other medical care but will complement other treatments to facilitate better health outcomes and associated stock market performance.
Given demographic shifts and the benefits of AI, healthcare appears ready to return to leadership due to its consistent and secular earnings growth. We expect the healthcare earnings recovery in 2024 to be one of the main drivers of potential outperformance in the sector.
See our weekly CIO Strategy Bulletin for more details