Donald Trump's election win prompted even more bullishness in a stock market that was already up significantly for the year. For healthcare investors, though, it represented yet another reason to dump some stock. Trump's appointment of industry skeptics like Robert F. Kennedy Jr., alongside broader expectations of a Republican crackdown on programs like Medicaid and Obamacare, has prompted a selloff in everything from hospitals to pharmaceuticals, health insurers and biotech.
The election jitters exacerbated what had already been a tough period for the industry. In 2023, healthcare underperformed the S&P 500 by about 22 percentage points, so many believed that 2024 would be a bounce-back year. Instead, history repeated itself, with yet another 20-percentage-point underperformance for healthcare. That created a valuation gap that looks like a historic aberration: The Health Care Select Sector ETF is trading at a more than 20% discount to the S&P 500 based on their forward earnings multiples, far larger than the average 5% discount seen over the past two decades, according to FactSet.
The market bearishness is partly due to financial fundamentals. At a time when the U.S. economy is on solid footing and tech companies are riding high on the AI frenzy, most healthcare subsectors seem to be caught in a negative earnings-revision cycle, writes Asad Haider, a healthcare equity strategist at Goldman Sachs. The reasons are idiosyncratic. For health insurers, it was due to higher-than-expected postpandemic costs as people returned in droves to hospitals and doctors. For pharma, some of the profitability issues have stemmed from higher acquisition-related charges as the industry seeks to make up for low growth with dealmaking. But the bottom line is that in a red-hot market, healthcare simply isnโt where investors want to be. Since the start of 2023, Goldman data shows healthcare with the second-biggest outflows among S&P 500 sector ETFs, behind energy.