Health Care Sector Equity Returns Have A Negative Relationship To Earnings Estimates

Equity returns and earnings estimates should presumably be related. It makes intuitive sense that if earnings estimates are increasing for a sector than equity prices for that sector should trend upwards as well. And this broadly holds up except oddly with the health care sector. Overall for the GKCI Developed Market Index, median next 12-months EPS estimates have a 62% correlation with the year-over-year price change of the index going back to 2003. So as next 12 months EPS estimates increase, the year-over-year change in the price of the GKCI DM Index usually increases as well. For many sectors, such as for financials and industrials, earnings estimates have over a 60% correlation to the equity returns of those sectors. However, in the case of health care, earnings estimate revisions actually have a -19% correlation with equity returns.