Citi analysts expect healthcare segment earnings to grow 19% in 2025, up from 4% this year. Analysts point to the stock's fair-sized valuation and potential for improvement in fundamentals. The sector has lagged the S&P 500's gains this year. The index rose 26%, while the index rose just 1%.
After a tough year marked by policy uncertainty and lagging fundamentals, healthcare stocks will turn around in 2025, says Citi.
The company notes that after months of huge valuations, the sector's valuations have improved, offering an attractive entry point.
“One year makes a big difference. Relative underperformance and flat absolute returns over the past year have gradually eased valuation concerns,” analysts said in a note Monday.
The sector has lagged the broader market's gains this year, rising just 1.1%, while the S&P 500 index is up 26.2% so far.
Analysts also note that underlying fundamentals are below par and a bottom could be reached soon.
“This was the most persistent underweight throughout 2024, but valuations are appropriately sized and fundamentals appear to be nearing a tipping point,” the analysts said.
Overall, the healthcare sector is expected to deliver revenue growth of 19% in 2025, compared to the expected 4% this year.
Analysts' calls come after a difficult year for the industry amid great policy uncertainty, especially after President-elect Donald Trump nominated Robert F. Kennedy Jr. as Secretary of Health and Human Services. It was done.
President Kennedy was a vocal skeptic of vaccines. In the days after his appointment last month, vaccine makers including Moderna, Pfizer, Novavax and GSK plunged.
But some analysts have since said the reaction was overblown, especially for weight-loss drug makers like Wegoby, Ozempic maker Novo Nordisk and Zepbound maker Eli Lilly.
BMO analysts argued in a note last month that the decline “reflects fear rather than actual fundamental downside risks.”
They say there is little risk to the stock prices of companies like Eli Lilly and Novo Nordisk because Mr. Kennedy's role has limited authority to change policies that affect drug pricing and availability. He said that it is considered possible.
Citi analysts seem to agree, predicting a return of 64% for Eli Lilly, the sector's largest stock, at 12%.
“While policy debates remain, we believe this is largely priced in,” the analysts said, adding that pharma and biotech stocks could lead the sector's outperformance in 2025. He added that it is expensive.
The analysts' call comes as the company expands its shift to selective defensive stocks. Some cyclical stocks have rich valuations but little near-term earnings growth, he said.
“Some of the traditional defensive industry groups look interesting. Some cyclicals may need to buy time as they have rich valuations but haven't yet seen a turnaround in earnings growth.” analysts wrote.
