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Editor’s note: Dear Readers, we’re making this newsletter more interactive, inviting you to share your thoughts about this or any previous First to Market. Selected comments will be published – completely anonymously – in a future issue to further spark contemplation and discussion. Send us your thoughts on this note by clicking here. We look forward to hearing from you!

“Harsh reality is always better than false hope.” ― Downton Abbey

Chart of the Day

Good morning!

Healthcare stocks are perhaps one of the hottest trades this year. But investing in them is fraught with potential hiccups. 

Out of 11 sectors, the S&P 500’s healthcare sector is the third-best performer this year, adding 4.2%, following behind the utilities sector’s 4.4% gain and energy sector’s 10% increase. In comparison, the overall index has lost 4.2% this year.

However, Health and Human Services Secretary Robert F. Kennedy Jr. has started cutting thousands of jobs from the department, which has led many to wonder if now is the time to rethink the typically dormant sector, which holds just a handful of stars. 

The short answer is that it’s notoriously difficult. That’s because it requires investors to closely review the minutiae of drug chemistry, the success rate of drug trials, and human anatomy. 

And if that’s not enough, it also takes forever for a typical drug to get approved to be sold, meaning that you could be waiting years to reap the reward of your investments. Industry group PhRMA says it takes 10-15 years on average to develop one new medicine from initial discovery and take it through regulatory approval. The Nasdaq Biotechnology Index, which holds shares of smaller biotech companies, is down 4.1% this year. 

Of course, not every company in the healthcare sector is involved with the making of drugs, but the same underlying trends influencing pharma and biotech have an impact on other industries in the sector, too. 

Then there’s the obvious question that applies to all sectors, not just healthcare, about what’s next, as investors are always discounting the future. 

That’s especially true in the case of Novo Nordisk, which became famous for its Wegovy and Ozempic drugs. For a brief point last year, Novo was Europe’s most valuable company, but its shares finished the year down 15%, conceding that spot to software group SAP, whose shares rose 60% in 2024. 

Novo’s sharp losses came after gains of 50% in 2023. This year, its shares have declined 27%, while SAP’s have gained 11%. The drugmaker has struggled to convince investors that it has a big follow-up to its blockbuster GLP-1 anti-obesity drugs.

Sell-side is still bullish on Novo. Out of the 35 analysts surveyed by FactSet, 66% are overweight, 29% are neutral, and 6% are underweight. The average 12-month price target is nearly double where shares finished Tuesday.

The disconnect reflects a bigger underlying trend—investors only care about healthcare during cycles. During the Covid-19 era, shares of vaccine makers shot up, driven by hopes of mass vaccinations, but they promptly came down after those jabs were no longer as important. Pfizer shares rose almost 70% in 2021 but have ended every year down since then. 

It’s worth noting that given the recent rally, healthcare shares look expensive compared to historical levels. Companies in the healthcare sector are trading at 17.71 times their projected earnings over the next 12 months, above its 10-year average multiple of 16.51, according to FactSet. The S&P 500, meanwhile, trades at a multiple of 20.25.

Investing in healthcare has its ups and downs, which might be fun for Ph.D. holders in healthcare and other medical professionals but not so much for others. 

Share your thoughts

Do you think the healthcare stocks rally still has legs? Click here to send us your response.

Here’s what a reader commented

Question: Do you think the risks of investing in private markets are worth the returns?  

Answer: I allude to alts as the great wealth transfer that no one talks about. Instead of boomers transferring their wealth to gen x,z,etc or men to women, it’s the LPs transferring their wealth to the GPs and the IRS. Once you factor in the mgmt/performance fees and taxes, there’s not much of a return to note. The other misleading factor of these private market averages and pitch books I’ve seen over the years are the alt funds (PE, HF, PC, Venture) that the average investor can get access to are nothing in comparison to ones that pensions, endowments and the ultra high net worth get access to. So alts managers preying on the average investor are using data from investments they actually cannot get into. So who are investing in these sub par alts that transfer their wealth from themselves to the GP? It’s for people that like to flaunt their wealth and need to be able to allude to their PE, HF & PC allocations at cocktail parties.

Catch up with FS Insight

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News We’re Following

Breaking News

• Wisconsin and Florida elections provide early warning signs to Trump and Republicans AP
• The four goals of Liberation Day — and whether they’ll work SEM

Markets and economy

• Tariffs will likely raise much less money than White House projects, economists say CNBC
• The FDA Is ‘Finished’ as Firings Sweep Health Agencies. Drug Stocks Are Falling. BR
• Trump’s unpopularity abroad may dent U.S. growth, Goldman Sachs economists say QZ

Business

• Hims & Hers shares rise as company adds new weight-loss medications to platform CNBC
• Intel’s new CEO is known to ‘underpromise and overdeliver.’ Can he do it again? MW
• Tesla Stock Drops on Delivery Day. Watch for This Number as Markets Brace for the Worst. BR
• Meta’s Head of AI Research to Leave as Chatbot Hits New Markets BR

Politics

• U.S. Looks for More Countries to Take Migrants WSJ
• With a nod to America’s civil rights legacy, Sen. Cory Booker makes a mark of his own AP
• US Attorney General directs prosecutors to seek death penalty in UnitedHealthcare CEO murder case SEM

Overseas

• Brazil Looks Like a Winner in the Global Trade War WSJ
• China’s New Barges Could Make a Tough Task Easier: Invading Taiwan NYT

Of Interest 

• A Canadian Company’s Tariff ‘Double Whammy’ Highlights Trouble for the Economy NYT