As we step into the year 2024, the global economy is showing increased resilience, paving the way for positive developments across various industries. Analysts predict that all 11 sectors of the S&P 500 index will experience profitable growth this year, with the healthcare, communication services, and information technology sectors expected to lead in profit expansion. Specifically, the healthcare sector is anticipated to achieve nearly an 18% growth in earnings per share in 2024.
Healthcare stocks encompass companies involved in pharmaceutical development, medical device manufacturing, and the provision of healthcare services or health management. These sectors hold the top three weights in the S&P 500 index, known for their resilience and defensive characteristics. The strengths include stable and enduring demand, lower volatility, and returns exceeding the average.
Medical stocks are an undeniable long-term opportunity. This article will review the recent performance of the healthcare sector, provide insights into the trends of healthcare stocks in 2024, and analyze their pros and cons. The aim is to assist investors in capturing diverse growth opportunities and mitigating short-term fluctuations.
A Strong Start: The Appearance Of The ‘Golden Cross’ In Healthcare Stocks For 2024
Thanks to enticing valuations and growth prospects, healthcare stocks have made a robust start in 2024, standing out as one of the best-performing sectors within the S&P 500 index.
Since the beginning of January, several healthcare stocks have exhibited a bullish technical indicator known as the “golden cross,” where the 50-day moving average rises above the 200-day moving average. This trend includes the healthcare select sector index ETF – SPDR (XLV), which tracks 64 selected U.S. healthcare stocks with a median market value of USD 33 billion.
On an individual stock basis, the U.S. pharmaceutical giant Eli Lilly, has not only sustained its upward momentum following an impressive 78.1% surge in 2023 but has also retained its position as the top-performing stock in the healthcare sector. It has also secured the ninth position in market capitalization within the S&P 500 index. In January alone, its market value surpassed Tesla, reaching a staggering USD 595 billion.
Additionally, Danish pharmaceutical company Novo Nordisk capitalized on the surging demand for diabetes and weight-loss medications in 2023, propelling it to become a leader in the European pharmaceutical industry and the STOXX Europe 600 index.
Two Major Trends In Healthcare Stocks For 2024
The soaring popularity of healthcare stocks in 2024 is intricately linked to two significant trends from 2023 – the rise of weight-loss medications and the explosive growth of AI. These two factors are poised to dominate the healthcare sector in 2024.
Weight-Loss Medications
The substantial demand for new medications addressing weight loss and diabetes has significantly boosted the profits and stock prices of developers in this category.
Eli Lilly (LLY) has witnessed a surge in its stock price, primarily driven by the promising outlook for its weight-loss medications, Mounjaro and Zepbound. Additionally, Eli Lilly is conducting trials for a drug to treat Alzheimer’s disease. Despite already being the world’s largest healthcare company by market capitalization, the anticipated sales of Mounjaro and Zepbound are expected to propel Eli Lilly’s stock one step further.
Similar optimism surrounds Novo Nordisk’s (NVO) drugs, with projected sales of Ozempic and Wegovy reaching 113 billion Danish Krone and 60 billion Danish Krone, respectively, in 2024.
Goldman Sachs notes that in 2024, global heavyweights in weight-loss medications, Eli Lilly and Novo Nordisk, along with their competitors, are likely to introduce similar drugs to address obesity and its associated issues. However, it’s important to note that most of these companies’ drugs currently involve injection treatments.
Reportedly, Kallyope Inc., a U.S. biotech company developing oral weight-loss medications, is eyeing the multibillion-dollar weight-loss medication market and is seeking an initial public offering (IPO) to raise funds.
AI + Healthcare
The explosive growth of AI since last year has continually showcased its diverse potential, especially in the realm of AI + healthcare, where pharmaceutical companies deeply invested in related fields stand to gain significantly.
Global pharmaceutical giant Novartis (NVS) has entered into a pharmaceutical partnership with Isomorphic Labs, an AI pharmaceutical company under Google. This collaboration involves leveraging AI technology for the discovery of new drugs. Additionally, Novartis has collaborated with other tech giants, such as teaming up with Palantir for data storage and partnering with Microsoft in chemical generation.
Xunfei Medical, a subsidiary of iFlytek (002230), leads the charge in the large-scale commercialization of AI solutions in the Chinese medical field. As a provider of AI diagnostic services, Xunfei Medical’s proprietary Xunfei Spark Medical Model is tailored for over 300 medical scenarios, surpassing GPT in natural language processing tasks. Recently, iFlytek announced the spin-off of Xunfei Medical and its intention to conduct an IPO on the main board of the Hong Kong Stock Exchange.
Dual Perspectives: Opportunities And Risks In Healthcare Stocks For 2024
Advantages of the Healthcare Sector
In addition to the boost from weight-loss medications and AI assistance, the healthcare sector in 2024 holds several favorable factors at its core.
Low Volatility
The perennial demand for healthcare services makes the healthcare industry less sensitive to overall market trends. This characteristic allows healthcare stocks to provide consistent and stable returns, positioning them as excellent defensive assets.
Low Valuations
After a lackluster performance last year, the healthcare sector currently stands at historically low levels in terms of valuations and institutional holdings. Considering the stability and predictability of the pharmaceutical sector’s growth, the downside risk is relatively small, with greater upside potential.
Expansive Growth Potential
Driven by new technologies and evolving demands, the healthcare sector presents numerous investment opportunities within various sub-sectors. Innovation-driven development in many healthcare segments is expected to bring about structural investment opportunities.
Disadvantages of the Healthcare Sector
Policy Uncertainty
Healthcare stocks often face challenges in presidential election years as healthcare costs become a political talking point. According to data from Strategas, in the past 12 presidential election years, the healthcare sector outperformed the S&P 500 index only in 3 years. Policy changes and uncertainty can make the industry a focal point of attention.
Low Profit Margins
Rising costs of technology research and innovation contribute to a continuous increase in healthcare expenditures. Simultaneously, there is a growing demand for improved regulatory systems to address escalating healthcare service and insurance costs. Balancing the need for better healthcare services at lower prices amid increasing costs could severely impact the fundamental aspects of healthcare stocks.
Intense Industry Competition
The entry of more technology companies into the healthcare sector, including giants like Google and Microsoft, has the potential to significantly disrupt existing business models. Additionally, innovative biotech companies might outperform traditional large pharmaceutical companies. The influx of new participants in the healthcare industry could reshape the rankings of existing healthcare stocks, intensifying competition within the sector.
In 2024, the healthcare sector in the stock market is expected to rise further, captializing on the surging trends surrounding weight-loss medications and AI. Given the current undervaluation of healthcare stocks and the vast potential for development, coupled with the inherently low volatility of healthcare stocks, they emerge as one of the optimal choices for defensive assets. However, investors should be mindful that everything has two sides. It is important to closely monitor whether the healthcare policies during the U.S. election year undergo significant changes. Additionally, in the context of intense industry competition, investors should assess whether healthcare enterprises can not only survive but also achieve profitability.
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