• Following a period of significant underperformance as compared to the broader market, the healthcare sector delivered a positive performance in August, ending the month as the second-best sector in the S&P 500 index.
• The fund had a strong month, with all sub-sectors, apart from medtech, contributing to the performance. Services was the strongest sub-sector.
• Despite the somewhat fragile recovery which is sensitive to the macroeconomic data, valuations remain attractive, with near record-low allocation, and we believe that with further clarity regarding sector-specific legislation there is potential for a rebound.

MONTHLY COMMENT

The healthcare sector delivered a positive performance in August, ending the month as the second-best performing sector within the S&P 500 index. The sector’s recovery followed a period of significant underperformance as compared to the broader market. The turnaround to a more optimistic sentiment was driven by a slightly brighter macro environment, a solid sector earnings season, and a market rotation out of AI tech companies.

A fundamentally solid earnings season

Looking back at the second quarter earnings season, it can be concluded that the earnings trends for the sector in general were positive and driven by solid revenue growth across most segments. The pharma sector demonstrated its continued robust performance in general with major players reporting better-than-expected sales growth, positive pipeline progression, and upward guidance revisions. Moreover, fundamentals for the medtech sector remained healthy despite mixed share-price performance. Robust procedure growth, rich product pipelines, and improving margin drivers all underpinned company optimism for the remainder of 2025. The healthcare service sector showed a bifurcation between the managed-care and the provider sub-segments. Large insurers posted resilient revenue growth but faced margin pressure from elevated medical cost trends, while hospital operators benefited from stable volumes and improved pricing, allowing several operators to lift their full-year outlooks.

A dovish tone from FED

Federal Reserve Chair, Jerome Powell, used the much-anticipated Jackson Hole address on August 22 to pivot back to a flexible inflation-targeting framework and signaled a readiness to ease policy should economic conditions warrant it. His speech, coupled with signs of labor-market softening and still-elevated but moderating inflation, triggered an immediate ‘risk-on’ response across global assets while leaving the equity market divided over the durability of the dovish tone. The market now seems to have discounted a one quarter-point cut at the September meeting, while some voices argue for two or even three cuts in total before year-end subject to the strength of the underlying market conditions.

More clarity on pharma tariffs

During the month, more clarity on EU-US pharma-specific tariffs emerged, with the US government releasing a statement committing to “apply the higher of either the U.S. Most Favored Nation (MFN) tariff rate or a tariff rate of 15 percent, comprised of the MFN tariff and a reciprocal tariff, on goods originating in the European Union”. Moreover, it has been indicated that Section 232 tariffs on pharmaceuticals from the EU (used to protect national security and domestic industries) are to be capped at a rate of 15 percent and included in the tariffs. Additional details and clarity are anticipated shortly.

While this was a positive clearing-event for the sector, the market reacted with only cautious optimism since President Trump continued his threat to implement significant price cuts of up to 1500 percent (!) on pharmaceuticals via MFN. In a response to President Trump’s frustration over the relatively lower drug prices in Europe, Eli Lilly decided to more than double the direct-to-consumer price in the UK on its obesity drug, Mounjaro, while leaving NHS pricing unchanged for eligible obesity patients. President Trump hailed the initiative at a recent cabinet meeting. For the time being, the market views Lilly’s initiative as a one-off event.

Lawmakers step up focus on ACA enhanced subsidies

The performance of the health insurers rebounded recently following discussions about the possible extension of Affordable Care Act (ACA) enhanced subsidies beyond their scheduled expiration at the end of the year. ACA subsidies cover an estimated 22 million people in the US, and as many as 7 million are projected to lose coverage by 2034 according to the Congressional Budget Office should ACA expire. Extending the ACA’s enhanced subsidies ahead of the midterm elections could be a politically savvy move for the Republicans, which would benefit hospitals and insurers by reducing uncompensated care and by stabilizing risk pools. However, many in the party are opposed, including influential voices like the Paragon Institute. The large associated costs are also a key hurdle for an extension.

The costs of an extension would impact other medical benefit programs including Medicaid, covering low-income earners, and Medicare, for the elderly population. The latter has increasingly come up in discussions as a potential funding source. Again, it should be emphasized that the upcoming midterm elections are an important factor for lawmakers participating in these negotiations.

REFLECTIONS

After six months of almost consistently declining healthcare sector development, we saw a strong performance in August, both in absolute terms and in relation to many other sectors. Although the recovery, in our opinion, is somewhat fragile and sensitive to macroeconomic data, we believe that attractive valuations and further clarity regarding sector-specific legislation can lead to stronger development in the second half of the year. September is usually considered the weakest month of the year and October the most volatile, so we are still cautious in our short-term assessment.

The healthcare services sub-sector performed strongly during August. Small- and medium-sized companies are likely to become increasingly attractive given the likely interest rate cuts in the US. Biotech is technically trading strongly, while healthcare services seem to have bottomed out. US pharmaceutical companies now appear to be viewed more positively by individual investors, albeit very few strategists even mention pharmaceutical companies as a sub-sector worth buying right now. Medical technology may have weaker development going forward. One possible reason for this could be that the other sub-sectors might be considered to be more interesting. However, we still do not see significant flows to the sector as a whole.

A possible rebound?

We may therefore be at a very early stage in a possible rebound for the healthcare sector. However, we still believe that this is happening now. We have interesting times ahead, where the relative allocation to the healthcare sector in relation to the stock market as a whole is near record low levels, valuations are visibly attractive, and fundamentals are largely intact, despite all the policy changes.

The tariffs do not seem to be particularly burdensome, the reform of Medicaid mainly affects hospitals, and international reference pricing will be a protracted process likely with little consequence for the industry’s profitability. What can be viewed as negative from an investment perspective is that the proportion spent on healthcare is now likely to reach its peak in the US. Globally, however, it should continue to rise.

Once this year is over, the pace of reforms in the US should slow down, and a brighter investment climate ought to emerge. If a more general interest from stock market participants returns to the sector with net purchases in 2026, the conditions for all sub-sectors should be good.