The Health Care sector has many positives, including an aging global population and rising emerging market middle class that will demand more extensive drug treatments and medical care. Meanwhile, balance sheets in the health care sector remain flush with cash, increasing the possibility of higher dividend payments, share-enhancing stock buybacks, and mergers and acquisitions. The durability of Health Care sector earnings during economic downturns tends to lead to outperformance during periods of economic weakness.
On the other hand, health care reform probably will be a focus during the run up to the 2020 elections, prompting volatility to increase. Proposals to cut costs, which could weigh on providers’ profitability, may come from both sides of the political aisle. In addition, the fiscal situation in Washington has created uncertainty, as certain funding mechanisms in the Health Care sector could be changed as Congress deals with rising federal deficits.
In general, we believe the risk of major legislative changes is relatively low. Potential changes under discussion are well known, and probably already reflected in stock prices. We can see this in the current discount to the overall market of the healthcare sector’s price-to-earnings ratio; the sector has generally traded at a premium to the market over the past 20 years.
We believe an outperform rating for the entire sector is appropriate.
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Health Care sector.
* As represented by the S&P 500 index
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