Healthcare Sector Lags S&P 500, Shows Signs of Recovery

The U.S. healthcare sector has been the weakest performer within the S&P 500 index this year, appearing to be "chronically ill." However, as negative factors are gradually digested, this key defensive sector may be on the verge of a bottoming out and subsequent rebound.

Data indicates that as of this week, the healthcare sector ETF, Health Care Select Sector SPDR Fund (XLV.US), has declined 3.7% year-to-date, significantly lagging behind the S&P 500 index's 7.1% gain over the same period. This ETF covers a wide range of sub-sectors from health insurance companies to pharmaceutical firms and medical device manufacturers. Its diverse structure, which typically helps mitigate market risks, has instead seen across-the-board declines this year.

Health insurance companies have been particularly hard hit. Leading firms have seen their stock prices pressured by rising reimbursement costs. Pharmaceutical companies are also facing policy and cost pressures. The administration's continued push for drug price reforms, structural changes to the Food and Drug Administration, and potential tariffs have all cast a shadow over market prospects.

Even star companies known for their obesity drugs have not been spared from volatility. The company's latest clinical data for its oral GLP-1 weight loss drug was disappointing, following earlier market concerns about increased competition, leading to a 14.14% drop in its stock price on Thursday.

However, there are also positive signals emerging. The XLV ETF has stabilized around $132.50, near the $130 technical support level that has attracted buying interest multiple times since April. More importantly, since 2009, the healthcare sector has maintained a long-term upward trend that has not been broken. The current adjustment may be providing a window of opportunity for medium- to long-term investors.

Some of the hardest-hit stocks are beginning to show signs of recovery. Pfizer's stock rose 4% after its earnings report on Tuesday, with revenue and profits exceeding market expectations. Although Merck's sales fell short of expectations, its stock price held firmly above the $77 support level. Market sentiment suggests that without more severe negative catalysts, the downside for these stocks may be limited.

The valuation advantage is also appealing. As of now, the forward price-to-earnings ratio of the healthcare ETF is only 16 times, significantly lower than the S&P 500 index's 22 times, with a discount of 27%. This discount is nearly double the average discount over the past decade.

In terms of growth potential, the healthcare sector's average annual earnings growth rate is expected to reach 11% in the two years following 2025. The driving forces behind this growth include the rapid expansion in the obesity drug market and the sustained growth of medical device companies.

A chief analyst expressed optimism about the sector, stating that the earnings expectations for the healthcare industry are more achievable than the average. The analyst advised investors to focus on the sector's long-term performance potential.