Why analysts say healthcare’s recent underperformance presents an opportunity

Investing.com — The healthcare sector has lagged consistently behind the benchmark for the past 12 months, according to analysts at Wells Fargo.

In a note to clients on July 1, they added that, like much of the broader market, the gains in the sector have been very narrow, with only a few stocks performing well during that time.

Part of the reason for the sector-wide weakness, they argued, is that the healthcare sector has only a limited number of players exposed to artificial intelligence. This has weighed on the industry, particularly as during a period when many investors are focusing on growth stocks linked to the nascent technology.

The analysts also said that the prospect of higher-for-longer interest rates has lessened the allure of defensive healthcare stocks, small caps, and other “rate-sensitive sub-sectors such as Biotechnology.”

They added that the growing popularity of GLP-1 obesity drugs, while boosting a handful of companies, has exacerbated “concerns over the potentially negative impact on certain key markets within healthcare.”

Even still, the analysts said investors could face an “attractive buying opportunity” from healthcare’s underperformance, especially as the Federal Reserve possibly looks to roll out interest rate cuts this year.

“Given our favorable guidance on the sector and optimism about its outlook, we believe the current environment offers long-term investors the opportunity to build core positions in healthcare names,” the analysts said.