Investors cooled to the healthcare sector in 2024, which dramatically trailed global and US equity markets for the year. As a result, the sector’s share of the MSCI World benchmark shrank to 10.7%—the lowest in more than a decade (Display).
Healthcare stocks were hurt by volatility from factors that include policy-related uncertainty, which hasn’t faded since the US election. Many investors are now asking: how will the policy changes under a new US administration affect healthcare companies?
Healthcare Stocks Are Hurting but Healthy
As we see it, these concerns don’t reflect healthcare’s fundamental performance, which remains more resilient than perceived. In fact, even as the healthcare sector’s price/earnings valuations have fallen, earnings estimates have trended significantly higher. Given the strong outlook, we think active equity investors can still find healthcare companies with strong growth potential—and at historically compelling prices.
The healthcare sector is diverse, so investors should cast a wide net in the hunt for quality companies. But stock selection remains key, since not all healthcare firms thrive under similar conditions. For instance, some are closely tied to consumer discretionary trends while others succeed through technology advancements such as artificial intelligence. Similarly, a firm may have a strong business model and favorable outlook but remain throttled by economic downturns in its primary markets.
We believe companies with innovative products and services that address acute challenges facing healthcare systems should ultimately prevail. To us, investing in long-term growth isn’t about finding the next groundbreaking cure but rather discovering companies with high-quality businesses and consistent profitability, from healthcare providers to equipment makers.
Healthcare’s Benefits Beyond Compelling Prices
We think today’s exceptionally low valuations signal underappreciated vitality that could offer attractive entry points for investors who know where to look. But the healthcare sector provides more than just attractive valuations. For example, the defensive nature of healthcare stocks can also add ballast to a portfolio amid uncertain economic climates, especially if inflation and interest rates remain higher for longer. Then, there’s the upside potential of companies whose solid fundamentals, we believe, should be rewarded as the market starts to widen its focus beyond a handful of technology names.
Does the political climate offset these benefits? In our view, disruptive healthcare legislation is unlikely in the near future, considering the Republican party’s narrow majority in Congress. And the new leadership of Health and Human Services has softened its stance on several hot-button topics, including vaccines, while indicating the prioritization of food safety.
Healthcare could remain volatile for some time, and near-term political and policy risks to healthcare stocks certainly bear watching. But we find that focusing on high-quality businesses across the broad healthcare spectrum can help investors find stocks with long-term return potential that is unlikely to be derailed by policy change.
