Healthcare: Solid Fundamentals Overshadowed by the Tech Rally

• Rune Sand
  Portfolio Manager
  DNB Asset Management

The MSCI World Index rose by 9.6 percent on a U.S. dollar basis, marking its strongest monthly gain since November 2020. Broad benchmark indices such as the S&P 500 and the Nasdaq are also trading at or near their all-time highs again. The rally was driven primarily by technology and AI-related companies: Their quarterly results were strong, while announced capital expenditures exceeded expectations. This was complemented by continued robust macroeconomic data. Despite geopolitical uncertainty and the associated energy price shock, global equity markets thus proved remarkably resilient.

The healthcare sector barely participated in this rally in April. The MSCI World Health Care Index fell by 0.2 percent on a U.S. dollar basis, underperforming the broader market by 9.8 percentage points—the sector’s weakest relative month in 17 years. However, this unusually strong underperformance is less a reflection of fundamental weakness than the result of a short-term market rotation: investors favored more cyclical and AI-exposed market segments. In this environment, the healthcare sector apparently served as a source of funding.

In our view, this discrepancy between weak price performance and stable fundamentals warrants a constructive outlook on the sector. Many companies are growing largely as expected, earnings look solid, and political and regulatory risks also appear to be easing. We currently see no discernible fundamental reason why the sector should lag so significantly behind the broader market.

U.S. health insurers performed particularly well in April. Stocks such as Centene, UnitedHealth, and Humana rose significantly, supported by strong quarterly results and a significantly upwardly revised preliminary adjustment to Medicare reimbursement rates. Individual innovative healthcare companies also made positive strides: Glaukos impressed with a strong quarterly report, Axsome Therapeutics benefited from U.S. approval of a drug for Alzheimer’s-related agitation, and Novo Nordisk rose without specific corporate news; the stock was likely supported by the continued strong U.S. sales growth of the oral version of Wegovy.

For large parts of the healthcare sector, artificial intelligence is likely to have a supportive rather than a negative impact in the long term. While investor attention is currently focused primarily on hyperscalers and semiconductor stocks, numerous concrete application areas are emerging in the healthcare sector: Pharmaceutical companies are investing in AI and supercomputing to accelerate drug development and reduce development costs. Medical technology companies are integrating AI into software solutions, while healthcare providers can reduce costs.

At the same time, AI is not exclusively positive for all segments of the sector. A potential risk of disruption exists for CROs—contract research organizations that support pharmaceutical companies in clinical trials and analyses. Here, the market is debating whether AI could take over parts of outsourced research and analysis tasks in the future. At the same time, CROs could also use AI to improve their own offerings and support clinical trials more efficiently. For the rest of the healthcare sector, we believe that the long-term opportunities arising from the use of AI currently outweigh the risks.

There is another supporting factor: M&A. Many large pharmaceutical companies face significant patent expirations in the coming years and need to replenish their product pipelines. At the same time, they have strong balance sheets, high cash reserves, and low debt. This creates favorable conditions for a revival of M&A activity in the biotech segment.

From a valuation perspective, the healthcare sector also warrants a nuanced view. European pharmaceutical stocks often trade at a discount to their U.S. counterparts. This reflects real structural factors such as price pressure, slower market access, and fragmented markets, but it can also present opportunities for globally positioned companies with strong pipelines and high U.S. exposure. The key question remains whether the market is underestimating structural growth or whether the discount is justified by patent expirations and weaker research productivity.

Of course, the sector is not without risks. In medical technology, higher oil prices and rising logistics costs can weigh on individual companies, particularly for products containing plastic components. Outside of medical technology, this effect is significantly less pronounced: for pharmaceutical companies, raw material costs play only a minor role; for biotech companies, even less so; and healthcare providers are hardly affected at all. Isolated product recalls, such as the recent one involving Insulet, can also put short-term pressure on share prices. In this specific case, the recall reportedly affected about 1.5 percent of global production volume; no long-term negative impact on the company is currently expected.

The overall picture thus remains positive: The healthcare sector is fundamentally sound, defensive in nature, and highly innovative. Short-term price movements remain difficult to predict; the positive outlook focuses primarily on long-term structural drivers. While investors have recently been primarily driven by tech and AI euphoria, the healthcare sector could once again come into sharper focus. For investors focused on quality, structural growth, M&A potential, and long-term AI applications, the sector thus remains worth a closer look.