Why Fearful Investors Could Drive Health Care Stocks Even Lower
Despite strong earnings forecasts, health care stocks lag behind the broader market due to mounting regulatory concerns.
Last year’s top-performing stock sector has turned into this year’s laggard. Health care stocks have struggled, rising only 2% compared to the S&P 500’s impressive 16% gain since the beginning of the year, primarily due to escalating regulatory risks. This looming regulatory pressure is overshadowing the sector’s optimistic earnings outlook, with health care companies projected to deliver the second-highest profit growth among all 11 S&P 500 sectors in Q1, according to the Wall Street Journal.
Key players like CVS Health Corp. (CVS), Walgreen Boots Alliance Inc. (WBA), UnitedHealth Group Inc. (UNH), Humana Inc. (HUM), Cigna Corporation (CI), and Johnson & Johnson (JNJ) have all felt the weight of these regulatory anxieties. Brock Moseley, founder of Miracle Mile Advisors, told the Journal, “Investors are nervous due to the significant uncertainty surrounding future regulations.”
Long-Term Challenges Facing Health Care Stocks
- Substantial unpredictability about upcoming policies;
- Stricter drug regulations;
- Increased pricing pressures from Washington;
- Democratic proposals advocating Medicare for All;
- Declining profits driven by reduced generic drug rebates.
Source: The Wall Street Journal
Implications for Investors
Regulatory fears intensified after House Democrats unveiled the details of a Medicare for All bill in February, proposing a new federally funded health care system. Investors are concerned about the potential impact on drug prices and insurance premiums. Moseley commented, “The health care sector is under intense scrutiny, particularly regarding drug pricing, which raises valid concerns.”
While the overall earnings outlook for health care remains positive, pharmaceutical companies face a notable setback. Earnings for this segment are forecasted to decline by 4% year-over-year, marking it as the only industry within the health care sector expected to contract, based on FactSet data reported by the Journal.
On Tuesday, UnitedHealth and Johnson & Johnson both reported earnings surpassing expectations. Johnson & Johnson’s stock initially surged but settled with modest gains by market close, while UnitedHealth’s shares ended slightly lower. Despite these results, regulatory challenges continue to cast a shadow over the entire sector.
Looking Forward
Although regulatory uncertainties weigh heavily on investor sentiment, health care stocks have historically provided growth potential and served as safe havens during market turbulence. While tighter regulations may slow growth, any market pullback that heightens investor anxiety could paradoxically benefit the health care sector by attracting cautious capital.
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