Strategas sees health care outperforming in 2025
The health care sector is poised to see a rebound and lead the market this year, according to Strategas analysts, in part because some of the biggest players in the market have been beaten down by regulatory concerns over the last two years. “Health care’s weight in the S & P is at its lowest … in about 25 years. So you have this generational oversold condition,” explained Chris Verrone, head of macro and technical trading at Strategas, adding that he sees medical device makers ranking among the most attractive stocks now. “It’s the place where you’re seeing the biggest price improvement. Names that come to mind — Agilent , Abbott [Laboratories] — you’re starting to see some hints of life,” he said. Shares of both stocks are up more than 10% in the first few weeks of the year, while the iShares U.S. Medical Devices ETF (IHI) has gained more than 9%. IHI YTD mountain The iShares U.S. Medical Devices ETF year to date. Health care outperforms under Republicans As the Trump administration and Republican-led Congress look to cut federal spending, the shifting regulatory environment has weighed most heavily on life sciences, hospitals and health insurers with the greatest exposure to Medicaid. Yet, those same subsectors tend to outperform the overall market in the first year of Republican presidential terms, dating back to the first Reagan administration in 1981. Over this period, health stocks have gained an average of 7.6% compared with an average gain of 5.1% for the S & P 500, Strategas analysts wrote in a note to clients. “We believe investors price in the potential earnings cuts before the new president takes office and the stocks benefit when the worst-cast scenario does not materialize,” they wrote. Health insurer overhang could lift The large-cap health insurers have been among the sector’s worst performers, with the S & P Managed Health Care sector posting two consecutive years of negative returns for the first time in a quarter century. Under the Biden administration, insurers faced increased pressure on Medicare Advantage reimbursement rates. Now, the concern is that the Trump White House and Congress will look to cut funding for the Medicaid safety net program, in an effort to extend $4 trillion in expiring tax provisions from the 2017 tax cuts. Medicaid insurers Centene and Molina Health are both trading lower since Trump’s election, with Molina shares down nearly 9%. Hospital operators like HCA Holdings and Universal Health Services have slipped nearly 15% and 13%, respectively, since election. The proposals for Medicaid cuts include reducing the federal matching rate for the joint federal-state program, including the enhanced match under the Affordable Care Act for states that expanded Medicaid to cover low-income individuals earning above the poverty level. Strategas analysts expect “moderate Republicans will work to water down the cuts,” and states that have taken advantage of Medicaid expansion will also push back. Over the last five years, seven states including Republican-led Oklahoma, Missouri, Nebraska and South Dakota, have joined this group. Big PBMs could still face pressure The pressure may not let up as much for the major insurers such as UnitedHealth Group , CVS Health , Cigna and Elevance , which also control pharmacy benefits management units. The PBMs have come under bipartisan criticism for their lack of transparency when it comes to drug pricing contracts. “Notably, President Trump has indicated that he wants to do something for pharma and the PBMs are in his sights,” Strategas wrote, adding that industry reforms could make it into Congress’ next continuing resolution bill, which must be passed before March 14. The large PBM parent companies deny that they are the cause of high drug prices, but business models have been changing in the wake of regulatory pressure. Earlier this month, UnitedHealth said that its PBM unit would pass through all of the rebates or discounts it negotiates to patients on all of its contracts by 2028. The S & P 500 Managed Care subsector is up nearly 6% year to date.
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