According to analysts from Strategas, the healthcare sector looks set to bounce back and lead the market this year. This optimistic outlook is partly due to some of the sector’s most significant companies having taken a hit over the last couple of years amid regulatory concerns. Chris Verrone, who heads macro and technical trading at Strategas, noted, “The weight of healthcare in the S&P is at its lowest in about 25 years. We’re looking at a generational oversold situation.” He pointed out that medical device manufacturers are among the most promising stocks currently, mentioning “Agilent and Abbott Laboratories as examples where we’re starting to see some life.” Both companies have seen their shares rise by more than 10% early this year, with the iShares U.S. Medical Devices ETF (IHI) also gaining over 9%.
Interestingly, healthcare tends to perform well under Republican leadership. During the first year of Republican presidencies, dating back to Reagan’s era starting in 1981, healthcare stocks have averaged gains of 7.6%, compared to a 5.1% average from the S&P 500. The changes in regulation, which often affect life sciences, hospitals, and Medicaid-exposed health insurers the most, provide these sectors with an edge. “Investors typically factor in potential earnings cuts before a new president assumes office, which then allows stocks to benefit when worst-case scenarios don’t prevail,” Strategas analysts conveyed in a client note.
Health insurers have struggled recently, particularly under the Biden administration, which saw heightened pressure on Medicare Advantage reimbursements. Currently, under the Trump administration, there are concerns about possible funding cuts to Medicaid, as they aim to extend expiring tax provisions from the 2017 tax cuts. Both Centene and Molina Health, Medicaid insurers, saw trading dips after Trump’s election, with Molina shares declining almost 9%. Meanwhile, hospital operators like HCA Holdings and Universal Health Services are down nearly 15% and 13%, respectively.
Proposals to cut Medicaid involve reducing the federal matching rate for this joint program, including the enhanced match for states that expanded Medicaid under the Affordable Care Act. However, Strategas analysts predict that “moderate Republicans will attempt to soften these cuts,” and states benefiting from Medicaid expansion will resist. Over the past five years, even Republican-led states such as Oklahoma, Missouri, Nebraska, and South Dakota have embraced this expansion.
Pressure might persist for large insurers like UnitedHealth Group, CVS Health, Cigna, and Elevance, which oversee pharmacy benefits management (PBM) units. These units have drawn bipartisan scrutiny over their opaque drug pricing contracts. Notably, President Trump has shown an interest in addressing pharmaceutical issues, with PBMs potentially being targeted. Upcoming industry reforms might become part of Congress’ next continuing resolution bill, which faces a March 14 deadline. Although large PBM companies deny responsibility for high drug prices, their business models are adapting due to regulatory pressures. Earlier this month, UnitedHealth announced that by 2028, its PBM unit would pass all negotiated rebates or discounts directly to patients under all its contracts. Currently, the S&P 500 Managed Care subsector has risen nearly 6% this year.
