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BOFA UPGRADES HEALTHCARE SECTOR

After rating the healthcare sector as underweight for two years, BofA's Savita Subramanian has now upgraded it to overweight, noting that "regulatory and fiscal risks are likely priced in."

The equity and quant strategist said that long only fund managers had sold healthcare stocks to chase the AI theme. But she wrote that "sector margins could benefit from what's been a slowing in healthcare wage growth and perhaps relatedly, the implementation of AI."

While Subramanian says that leverage is still a risk, she adds that U.S. Federal Reserve rate easing "signals the end of refinancing risk at the short end."

Savita also points out that healthcare is on track for a record year in M&A, based on deals announced. And she adds that the 3 month guidance ratio for healthcare is "well above the long-term average, reaching the highest levels since COVID."

And on top of this she cites BofA analyst estimates that more than 75% of clinical trial costs are coming from areas that "are ripe for AI optimization."

As for the S&P 500 healthcare sector's .SPXHC recent performance, the index, after almost 6 months of trading more or less sideways, started to really take off on the last day of September, rising 2.45% in a single day. And the sector didn't stop there. In all it has advanced in 6 out of the last 8 sessions. The most recent rally was sparked when Pfizer PFE.N and U.S. President Donald Trump cut a deal with the drugmaker agreeing to lower prescription drug prices in the Medicaid program - compared to its charges in other developed countries - in exchange for tariff relief. Trump said he expected more drug companies to follow suit.

And out of the S&P 500's 11 major industry sectors it now has the 7th strongest year-to-date percentage gain, up 5% so far. Compare this to Sept 19, when it was the weakest of the 11 sectors YTD, and down 0.4% at a time when the S&P 500 was up 13% for the year. At the time, Jay Kaeppel, senior research analyst at Sentimentrader.com had put out a note saying that insiders were buying up shares in healthcare companies and examined whether this should nudge other investors to jump in.

(Sinéad Carew)

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