Taking the Temperature of Healthcare Stocks

Healthcare Offers Durable Earnings Potential at Attractive Price Points

Healthcare stocks have underperformed the global market this year. But taking a closer look under the sector’s hood reveals a more complex picture. In key industries, earnings growth forecasts are healthy and valuations look attractive.

Investors in healthcare stocks have been disappointed in 2023. With mega-cap technology stocks driving global equity markets amid excitement over artificial intelligence (AI), other sectors have been left behind. The MSCI World Index advanced by 7.9% through October 31 in US-dollar terms, while the MSCI World Health Care Index fell by 6.0%.

Industry Growth Forecasts Defy Weak Returns

Within the sector, we’ve seen a wide range of returns (Display). For example, pharmaceuticals and healthcare technology companies have declined modestly, while shares of life-sciences tools and services firms tumbled by 21.6%. Yet at the same time, every industry group within the global healthcare sector has seen positive consensus earnings growth forecasts for 2024 versus 2023.

By the end of October, the MSCI World Health Care traded at a price/forward earnings ratio (2024) of 16.2x, a 5.2% premium to the MSCI World. However, the sector has historically traded at a larger premium to the broader market. And as a result of falling share prices and positive earnings growth, we believe valuations of healthcare stocks look attractive in historical perspective. Based on price/earnings valuations over the last 10 years, most healthcare industries are valued below the 40th percentile of all monthly observations.