Healthcare has become a prominent sector in the market, benefiting from a shift away from technology and AI-focused investments. Investors are rotating into healthcare due to its defensive growth appeal, reasonable valuations, and positive sentiment across several sub-industries. This comes even as overall estimated earnings for the sector have significantly declined by approximately 15% since March 31, falling from $78 billion to $66.2 billion. The sector is now anticipated to report a 9.5% earnings decline, a stark contrast to initial expectations of 6.7% growth.
Despite the challenging earnings outlook, the Health Care Select Sector SPDR Fund (XLV) has recently reached new highs, gaining about 8% in the second quarter. This momentum is supported by strength in managed care, medical technology, and certain pharmaceutical companies. UnitedHealth Group (UNH) has been a key driver, rebounding after an external review affirmed high accuracy in its HouseCalls unit's diagnoses. However, a significant drag on sector-wide earnings has been biotechnology, particularly Gilead Sciences (GILD), which faced substantial one-time research and development charges. Excluding Gilead, the healthcare sector's earnings would be projected to grow by roughly 6.5%.
Upcoming earnings reports will be critical, with Elevance Health (ELV) reporting on July 15, expected to announce earnings near $6.21 per share on approximately $48.8 billion in revenue, and UnitedHealth Group (UNH) on July 16, with anticipated earnings around $4.84 per share. Investors will be scrutinizing medical cost trends, Medicare Advantage margins, utilization rates, and regulatory pressures. Companies like Pfizer (PFE) are trading at low forward earnings multiples (around 8x) with high dividend yields (above 7%), but face concerns regarding post-COVID revenue, patent cliffs, and future growth prospects. Novo Nordisk (NVO) is another name drawing attention, trading at about 14 times forward earnings, benefiting from strong demand for its GLP-1 obesity drugs like Wegovy, though potential pricing pressure is a concern.
The sector's setup for earnings season is characterized by low expectations and reasonable valuations, suggesting that even signs of stabilization could lead to further upside. Margins are expected to decline year-over-year, from 8.1% to 7.0%, and companies will need to demonstrate their ability to offset rising costs. Free cash flow generation, strong balance sheets, and consistent dividends are also key priorities for investors. While biotechnology has pressured overall sector earnings, five out of six healthcare sub-industries, including healthcare technology, providers and services, pharmaceuticals, medical equipment, and life sciences tools, are still projected to achieve earnings growth, which investors will monitor closely into the second half of the year.
