The healthcare sector is poised to see a rebound and lead the market this year, according to analysts at Strategas, in part because some of the market's biggest players have been beaten down by regulatory concerns over the past two years. “The weight of healthcare in the S&P is at its lowest point… in about 25 years. So it has this generational condition of overvaluation,” explained Chris Verrone, head of macro and technical trading at Strategas, and He added that he sees medical device makers ranking among the most attractive stocks now. “It's the place where you're seeing the biggest price improvement. Names that come to mind – Agilent, Abbott [Laboratories] – You're starting to see some hints of life,” he said. Insurers with the highest exposure to Medicaid. Compared with an average gain of 5.1% for the S&P 500, analysts at Strategas wrote in a note to clients “The scenario does not materialize,” they wrote. Health insurer Overhang could lift large-cap health insurers from the sector's worst performers, with the S&P managed care sector posting two consecutive years of negative returns for the first time in a quarter-century. Under the Biden administration, insurers faced increased pressure on Medicare Advantage reimbursement rates. Now, the concern is that the Trump White House and Congress will seek to reduce funding for the Medicaid safety net program, in an effort to extend $4 trillion in tax provisions that will expire from the 2017 tax cuts. Medicaid insurers Centene and Molina Health are trading lower since Trump's election, with Molina shares down nearly 9%. Hospital operators like HCA Holdings and Universal Health Services are up nearly 15% and 13%, respectively, since the election. Proposals for Medicaid cuts include reducing the federal matching rate for the federal joint state program, including enhanced matching under the Affordable Care Act for states that expanded Medicaid to cover low-income people who earn above the poverty level. Strategas analysts expect “moderate Republicans will work to water down the cuts,” and states that have taken advantage of Medicaid expansion will also push back. In the past five years, seven states, including Republican-led Oklahoma, Missouri, Nebraska and South Dakota, have joined this group. Large PBMs could still face pressure, the pressure may not yield as much for major insurers, such as UnitedHealth Group, CVS Health, Cigna and Elevance, which also control pharmacy benefit management units. PBMs have come under bipartisan criticism for their lack of transparency when it comes to drug pricing contracts. “In particular, President Trump has indicated that he wants to do something for pharmacists and that PBMs are on his side,” Strategas wrote, adding that industry reforms could make their way into the next continuing resolution bill. Congress, which must be approved before March 14. Large PBM parent companies deny they are the cause of high drug prices, but business models have changed in the wake of regulatory pressure. Earlier this month, UnitedHealth said its PBM unit would pass on all rebates or discounts it negotiates to patients on all of its contracts by 2028. The S&P 500 managed care subsector is up nearly 6% year to date .
