S&P 500 healthcare index stocks are proving to be a reliable defensive play during market volatility. US healthcare stocks have gained 1.10% in weighting within the broader S&P 500 Index (US 500) since February 2020 pre-Covid-19 levels. But they remain below historical high weightings – leaving room for further growth over the next year, analysts say.
Health Care Select Sector SPDR ETF (XLV) vs S&P 500
The S&P 500 Health Care SRHC Index, a basket of 68 S&P 500 component stocks, currently carries a 14.9% weighting within the S&P 500, compared to the all-time-high 16% weighting achieved twice since 1979, according to data maintained by DataTrek Research. Previous highs came at the start of the 2003 post-9/11 rebound and in the early 2009 wake of the subprime mortgage crisis.
Health Care Select Sector SPDR ETF (XLV) price chart
Pfizer Inc. (PFE) price chart
“So far in 2022, healthcare, as measured by the Health Care Select Sector SPDR ETF (XLV), has lost 9% but it has still outperformed relative to the S&P 500,” said Capital.com analyst Piero Cingari. “During times of uncertainty, the healthcare sector tends to outperform the broad market, since investors choose companies with solid businesses that are not correlated with the economic cycle.”
Pfizer Inc. (NYSE: PFE)
Index weighting ebbs and flows
Since S&P 500 weighting allocations are a zero-sum game, and increases in one sector come at the expense of others, the healthcare sector is DataTrek’s current top defensive strategy, as tech stocks experience earnings multiples compression in a rising interest rate environment, with underperformance being the result.
Gilead Sciences (GILD) price chart
Additionally, “a continued return to ‘pre-pandemic’ life” is expected to shift consumer spending away from tech in favour of other activities, DataTrek co-founder Nick Colas said in a research note Tuesday.
Gilead Sciences Inc. (GILD) price chart
“Healthcare’s time-proven ability to outperform in bear markets makes it our top defensive idea,” Colas said. “As growth investors cycle out of Tech, trading for forward earnings, healthcare’s stable growth and lower multiple offers an attractive alternative.”
Within the healthcare sector, Capital.com’s Cingari prefers pharmaceutical stocks over the biotechnology and health tech sectors.
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Year-to-date, “the industries that have suffered the most are Biotech and Healthtech, as they began the year with extremely high valuation, and the increase in interest rates has impacted the expectations of future cash flows for these firms,” Cingari said.
Novartis AG (NYSE: NVS)
Among the pharmaceutical stocks, Cingari likes the more proven names, such as Gilead Sciences (GILD), Novartis AG (NVS) and Pfizer (PFE) for offering relative value amid market uncertainty. “Pharma stocks have excellent dividend yields and valuations that are not overly expensive in this context,” noted Cingari. “They might provide a safe haven against the risks of a US economic slowdown.”