Healthcare's Momentum Story

A Sector Upswing is Drawing Investor Attention

• Video Transcript

  It's an interesting dynamic we're experiencing right now. I think everybody knows that tech has done very very well on the AI trade, but valuations have gotten a little high and the fact is that it's not a demand problem, potentially supply problem of chips to be able to drive the level of growth that justifies those valuations. And as investors are heavily exposed, given these are, you know, large percentages of the overall uh indices, uh they're looking for ways to hedge themselves against it. And they're looking for places that have relatively stable demand because there are some concerns about the broader economy being able to continue at this pace.

  And they're looking for something that's relatively cheap and healthcare, which had lagged earlier this year quite a bit, generally fits the bill. Now, the question is, is this just a hedge against the AI trade or is this actually something more fundamental? And our partners at Baird Strategas actually are seeing a little bit more fundamental momentum rather than just as a hedge against that which is exciting and a lot of this is because we have experienced a little bit of a healthcare boom that started last September where a lot of the spending that had been paused by pharma and biotech has kind of reemerged and that's driving a little bit more momentum across the entire healthcare sector.

  So it's a little bit of a combo of uh tech hedge but also some underlying fundamental momentum that's starting to build in healthcare. I would say the evidence suggests that fundamentals have only started to turn and in many instances healthcare is kind of in the second or third inning of a recovery. We've just started to see, you know, kind of with the Q2 reports from these companies, you know, really some of this positive spending in the biopharma industry starting to manifest itself into numbers and things like the tools names and things like the contract research organizations. You know, some of the subsectors really starting to gain momentum.

  You've recently seen uh kind of health insurers have some recaptured momentum after they struggled for a little bit. Medtech's really the one sub sector that's still struggling and it's kind of hard to see where the turn's going to be there. But I would say, you know, some of the underlying factors, the vast majority of the subsectors in healthcare seem to be on the front end of kind of a demand surge and kind of an improvement off what have been a pretty low baseline over the last couple years.

  The sub sector with the most momentum right now is biotech. So just hit a 52- week high uh this week again uh coming off some pretty low lows. A lot of this was a little bit more macro. So for a period of time there was a lot of talk about the fact that the government wanted to cut drug pricing pretty heavily on the pharmaceutical companies. Obviously if you're a pharmaceutical company that gives you a little bit of pause about your spending. We also had a kind of seizing of capital markets activity for a period of time and biotech companies really need the capital markets to be open to be able to fund their trials.

  So what ended up happening is there was just a big pause in spending by both biotech and pharma. Uh come last September everything kind of came together to turn that around. So these deals called most favored nation status deals were starting to be signed by pharma companies with the government that agreed to some smaller pricing cuts, but some of that pressure off on the risk of major pricing cuts. And what you saw is pharma finally felt comfortable spending again. They weren't going to get their knees cut out from them on pricing and they felt like they could now develope more drugs, spend more on biotech companies, which they tend to buy to help fill up their pipeline to help replace uh their drugs which are going generic. And so you saw all that happen along with the capital markets opening where biotech companies finally got capital again to spend. That spending actually takes a little bit to manifest itself into actually flowing downstream to the companies.

  And so you're just starting to see that manifest itself. And you've seen a lot of momentum in a lot of the indices that uh you know represent the biotech industry or the pharma industry. And they've continued to hit 52- week highs recently. And most of that is going to be driven by large pharma buying biotech companies. And for a long time, we talked earlier, pharma companies were afraid to spend on their own development. They're also afraid to spend on buying uh biotech companies. That totally flipped.

  We have had seen really strong momentum and some pretty sizable deals where large pharma is buying, you know, five and 10 billion dollar uh deals for biotech companies. And that really gets a lot of enthusiasm. Generalist investors love the idea of waking up one morning and seeing a a stock that's doubled because it got taken out for 100% premium by pharma.

  The reason I'm enthused for healthcare is we've got a few different things that I think would drive a lot of investors to the sector. One is it's just starting to outperform after a long period of underperformance. Two, valuation remains relatively cheap compared to the average stock in the market. And you've also got some very exciting innovations that are happening. I'm really enthused for healthcare in the back half of the year. Healthcare struggled a little bit at the beginning of this year relative to some of the other uh quadrants of the market. Uh but what we've seen is healthcare is actually finally back to parity with the S&P 500 year to date. And there seems to be a lot of building momentum there.

After spending the past several years in a period of underperformance, the healthcare sector is experiencing a resurgence that has investors curious. According to Mike Perrone, Managing Director and Healthcare Specialist at Baird, investors are recognizing signs of fundamental improvement across large portions of the healthcare landscape as years of AI-driven gains have pushed valuations higher across portions of the technology market, creating questions about whether future earnings growth can keep pace with elevated expectations.

One of the clearest drivers is what Perrone describes as a “little bit of a healthcare boom,” where investment activity has accelerated after a period marked by cautious spending across pharmaceutical and biotechnology companies. That renewed investment is beginning to benefit a broad range of healthcare companies, like biotechnology firms, contract research organizations and specialized tools providers that support drug development.

High-profile advancements in research and innovation are also drawing attention back to healthcare, including positive clinical trial outcomes in major research categories like oncology and neurology. While research breakthroughs are only part of the investment story, they reinforce a broader theme. Healthcare innovation remains active and capital is increasingly being directed toward areas that are demonstrating meaningful progress.

At the same time, Perrone is closely monitoring healthcare utilization trends as an indicator of the sector’s strength. While some higher-cost procedures occurred at a slower pace earlier this year, Perrone notes that broader measures of healthcare activity, including hospital and laboratory volumes, have remained stable, suggesting underlying demand remains intact.

While every market environment poses uncertainties, Perrone believes the components for the continued recovery of healthcare are in place. Improving fundamentals, a renewed biopharma investment cycle and steady innovation are helping reshape investor perceptions of the healthcare sector and quietly build momentum.