S&P 500 Health Care Index is up 10% through Tuesday, outperforming the other 10 sectors in the benchmark for US stocks.
by Natalia Kniazhevich
As investors reconsider massive bets on artificial intelligence stocks, a rotation toward more defensive corners of the US equity market has left a clear winner this month: health-care companies.
The S&P 500 Health Care Index is up 10% through Tuesday, outperforming the other 10 sectors in the benchmark for US stocks. The broader index is down 1.1% in the period. Eli Lilly & Co. has surged 29% to become the first health company with a $1 trillion valuation. Regeneron Pharmaceuticals Inc., Merck & Co. and Biogen Inc. are all up at least 18% since the end of October.
The rotation has been fueled, in part, by aggressive buying from hedge funds. The US health-care sector was the most net bought group for four consecutive weeks, while last week saw the largest inflow in more than five years, according to Goldman Sachs Group Inc. prime brokerage data. Mutual funds have followed suit, pushing investments in the sector past its weighting in the S&P 500, the bank’s data show.
“Investors are looking for value in a market that has some areas that are clearly priced for perfection and concerns about an AI bubble,” said Sarah Hunt, chief market strategist at Alpine Woods Capital Investors.
The surge in health stocks comes as the S&P 500 has been wracked by volatility, with big intraday swings becoming the norm of late. AI darlings like Oracle Corp. and Nvidia Corp. have been hammered as investors worry future profits might not justify current valuations. Consumer shares have also suffered amid concern a cooling labor market and persistent inflation will lead to less spending.
Health care’s momentum aligns with performance tracked by a hedge fund research firm PivotalPath, whose Healthcare Index gained 13% in the three months through September. The firm attributed gains to strong clinical-trial results, advances in AI-enabled R&D pipelines and renewed M&A activity across both biotech and pharma.
“Fund managers currently like the opportunity set in the health-care space. There is meaningful dispersion and outperformance is being driven by the combined forces of a buoyant M&A pipeline and regulatory tailwinds,” said Jonathan Caplis, chief executive officer of PivotalPath.
‘Real Inflection’
In a separate report highlighting quarterly positioning, Goldman said that funds entered the fourth quarter with their biggest health-care overweight in a decade, excluding brief surges in early 2020 and early 2023. During the third quarter, funds boosted their health-care overweight by 260 basis points while cutting Consumer Discretionary exposure by almost the same amount.
Among some of the biggest standouts, Merck shares have rallied 23% in November as Wall Street became increasingly positive on the company’s future beyond its blockbuster cancer drug, Keytruda, following recent acquisitions and clinical trial success. Regeneron shares have gained 21% following regulatory approvals for a higher dose of its eye drug that investors expect to put the therapy on a better footing compared to rival Roche Holding AG’s drug. And Amgen Inc. shares have climbed this month 14% following quarterly earnings results that beat expectations.
“Health care lagged for so long that people forgot it could grow. Now, you have a real inflection in both revenue and earnings, and the sector is finally getting rewarded for it,” said David Mazza, chief executive officer of Roundhill Financial Inc. “What makes the move even more compelling is that valuations are still attractive relative to history, so investors are getting improving fundamentals without paying peak multiples.”
Health-care stocks are trading at 18.7 projected 12-month earnings, compared with 22.1 for the S&P 500.
Goldman also noted that the shift to health care has been most pronounced within biotech, which has benefited from a resurgence of clinical breakthroughs, a pickup in dealmaking, and rapid adoption of AI-driven drug development. Alnylam Pharmaceuticals Inc. topped Goldman’s list of so-called “Rising Stars,” while Abivax SA, Natera Inc. and Cidara Therapeutics Inc. were newly added to the firm’s roster of hedge-fund VIPs, or stocks most-favored by hedge funds.
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