Market Commentary | December 16, 2021

Health Care Sector Rating: Outperform

The Health Care sector includes health care equipment and services (health care equipment and supplies, health care providers and services, and health care technology) and pharmaceuticals, biotechnology and life sciences tools and services.

Following the worst of the COVID-19 crisis, elective care has resumed, high expenses related to COVID-19 patient care have subsided, and medical equipment and pharmaceutical stocks have followed the market higher. Meanwhile, the sector has many favorable long-term attributes, such as new cost-saving and care-improving advances in medical technologies, an aging global population, and a growing middle class in emerging-market economies—all of whom will demand more extensive drug treatments and medical care over time. Valuations are relatively attractive, and balance sheets in the sector are generally in good shape, increasing the possibility of higher dividend payments, share-enhancing stock buybacks, and mergers-and-acquisition (M&A) activity.

There are still risks, however. Any legislation to control drug prices or raise corporate taxes could weigh on pharmaceutical companies’ profits—although promising pipeline drugs can mitigate these risks. Additionally, the Supreme Court in June 2021 ruled that the individual mandate provision of the Affordable Care Act (ACA) was constitutional, thwarting efforts to repeal the entire ACA and avoiding potential sector upheaval.

Positives for the sector:

  • Strong balance sheets, with ample cash for dividends and M&A
  • Positive long-term demographics trends, including an aging global population and a growing middle class in emerging markets
  • Return in demand for elective procedures, drug sales, medical equipment and diagnostics
  • Valuations are attractive relative to the sector's historical average
  • Biotech and pharmaceuticals have strong drug development pipeline
  • Supreme Court rejected latest challenge to ACA

Negatives for the sector:

  • Extended-care facilities have seen a decline in enrollments and are likely to see higher costs related to virus mitigation requirements
  • Defensive sector during an economic expansion—though this was not an impediment in the previous cycle

Risks for the sector:

  • Prescription drug price controls and other regulations
  • Target of anti-competitive regulation
  • Surge in COVID-19 variants could reduce demand for elective medical care
  • New competition from Amazon Care, a hybrid telehealth/in-person health care offering

What do the ratings mean?

The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:

  • Outperform: likely to perform better than the broader stock market*
  • Underperform: likely to perform worse than the broader stock market*
  • Neutral: no current view on likely relative performance


* As represented by the S&P 500 index

Want to learn more about a specific sector?  Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Health Care sector.

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Consumer Discretionary Information Technology
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