- The healthcare sector is lagging the S&P 500 for the fourth straight election year.
- But BMO Capital Markets believes a rebound is in order due to rising earnings and cheap valuations.
- Here are eight healthcare stocks to buy now, even as the election season heats up.
Healthcare stocks are underperforming in a presidential election year once again, but strategists at BMO Capital Markets believe the sector will look much more lively in the back half of the year.
There's a long-standing narrative on Wall Street that healthcare firms underwhelm ahead of US presidential elections since uncertainty about regulations can be a drag. But while the group has struggled in the last three election years, a larger sample size shows its record is mixed.
If healthcare's disappointing returns during recent election years are merely a coincidence, then the sector is getting a bad break again in 2024.
The healthcare sector's 7% return this year is less than half of the S&P 500's 14.9% gain. That puts it in the middle of the pack relative to other parts of the market, as it leads five sectors and trails five others. However, the group trailed the market by 20 percentage points in 2023.
Though less disastrous, healthcare's performance is still "abnormally weak," according to BMO. The investment firm expects a rebound soon — even in an election year rife with unknowns.
"Healthcare has been a significant underperformer, hitting extreme levels that have typically been an inflection point historically," wrote Brian Belski, BMO's chief investment strategist, in a mid-June note.
Why healthcare will come back to life
Although BMO doesn't formally have a bullish call on healthcare stocks, its strategists think the group is set for a near-term resurgence after four months of failing to generate material gains.
The Montreal-based firm believes healthcare and other sectors with a market-weight rating are casualties of investors' obsession with mega-cap stocks tied to artificial intelligence. Less flashy groups have trailed technology companies this year despite also posting solid fundamentals.
"These stocks are likely to close the recent underperformance gap in the coming months, should history serve as any sort of guide," Belski wrote.
At first glance, the lack of interest in healthcare stocks seems justified, given the group's subpar earnings growth. But that may be changing, as Belski noted that analysts have revised the profit estimates of 63% of healthcare firms higher in the last two months.
"Earnings growth appears to be the sore spot, as it has been in a steep decline and well below market levels," Belski wrote. "While we are not refuting this weakness, we believe levels are likely to improve as the sector continues to move past the 'tough comps' of the pandemic-fueled boom it experienced."
However, the upcoming earnings rebound for healthcare stocks isn't accounted for in valuations. Despite slight growth this year, healthcare is the second-cheapest among sectors by a variety of valuation metrics and is also historically inexpensive relative to the broader market.
"Multiples have certainly expanded throughout 2024, but current absolute levels are about average and more important are at a significant discount on a relative basis when compared to the S&P 500," Belski wrote.
8 healthcare stocks to buy before a revival
Even though healthcare has improving earnings prospects and is inexpensive, Belski urged stock-pickers to tread carefully when selecting companies in the sector since dispersions in forward price-to-earnings ratios in the group are wider than usual.
Fortunately for investors, BMO has done that legwork by highlighting a slew of top healthcare stocks in its US model portfolios. However, only eight of those companies have received an outperform rating from BMO analysts; the others don't have a rating from the firm.
Below are the eight outperform-rated healthcare stocks in BMO's model portfolios, along with the ticker, market capitalization, and group or groups that each is in.
