Key insights
- The author argues that the US healthcare sector is undervalued relative to its share of GDP, presenting a potential buying opportunity. Despite strong performance from LLY and JNJ, the overall sector market cap has declined significantly. The author suggests exploring individual stocks like MDT and TMO, which are currently underperforming.
I wish I could show you the chart I am looking at but I will describe it.
Healthcare spending as a share of US GDP has been in a long-term uptrend since 1994. It wobbles a little bit as other sectors surge in the short term (like the dot com boom) but it relentlessly marches up and to the right as our population ages, from 10% of GDP to 21% today.
On the flip side, the market cap of the S&P Healthcare sector has utterly collapsed since 2020, from 16% to 10%, almost eclipsing the 1994 low late in early 2025. Over time, the mkt cap share has tracked the trendline of GDP share but with more volatility. In general, when the GDP share has inflected up, the mkt cap share has inflected up more and vice versa.
What was happening in 1994? The Clinton administration was publicly positioning for massive price controls on the pharmaceutical industry. This policy was thwarted, resulting in a surge of the pharma stocks from 1994 to 1996.
So here we are again with maximum relative pessimism about the US healthcare sector in the stock market while healthcare spending relentlessly climbs.
This has happened DESPITE LLY close to all time highs and being 14% of the S&P healthcare sector. JNJ is #2 at 7% after a MONSTER move. The top two stocks have done really, really well but the sector's total market share has collapsed.
Therein lies an opportunity. XLV is the ETF for the sector. My personal fav is MDT which is #16 in the holdings ranking and just rolled over like a dying bird. TMO is #7 and has moved sideways for 5 years. Those are two places to start.