5. Healthcare
2023 return: 0.3%
Firms optimistic about the sector: Goldman Sachs, JPMorgan, Morgan Stanley, Societe Generale, UBS, Wells Fargo Investment Institute
Firms pessimistic about the sector: Bank of America, Deutsche Bank, Truist
Consensus thesis: Healthcare is a top choice for antsy investors since it offers high-quality, defensive growth — but government regulations on drug prices are a serious overhang.
Sector summary: The thesis for healthcare is eerily similar to that of last year, before the sector fell flat with a lackluster return of less than half a percentage point.
However, healthcare can live up to the hype this year as economic growth slows, several firms say. Those cautious about the economy favored this group, which can enjoy resilient demand in any economic environment given the noncyclical nature of its goods and services.
“Healthcare has underperformed YTD versus the market but is showing relative strength against broader defensives and remains our preferred defensive sector,” Morgan Stanley strategists wrote. “From here, we see the cohort as a late-cycle outperformer given its defensive and growth properties.”
Strategists at JPMorgan said they favored the sector “for its defensive growth properties, peaking rates, high screening across key characteristics (i.e. growth, value and quality) and reasonable valuation,” which Morgan Stanley found are in the bottom 30% of historical levels on a relative basis since 1995.
Those cheap valuations come despite the fact that the sector’s fundamentals have already fallen to the lowest levels since late 2022 and the depths of 2020, according to Goldman Sachs.
UBS sees healthcare broadly benefiting from innovation in the coming years, though it’s focused on pharmaceuticals in the near term. Morgan Stanley also likes pharma due to its enticing relative valuations, in addition to firms in biotechnology and healthcare providers & services.
Investment firms that are fading healthcare are either bearish on defensives, in Deutsche Bank’s case, or are worried about some combination of valuations and government regulation. Bank of America thinks some pockets of healthcare are pricey, though it also cited drug price regulations as a chief concern — especially in an election year. Truist’s equity team feels the same way.
“The sector is subject to policy risk during election year,” Truist strategists wrote, adding that its relative price trends and earnings momentum are still subpar.
