Healthcare's Puzzle: A Defensive Sector Underperforms
- Metta Associates
- Jun 17
- 4 min read
Defensive stocks are those that tend to hold their value during market downturns, offering stability when broader markets are under pressure. These typically include companies in sectors such as healthcare, consumer staples, and utilities—industries that provide essential goods and services people rely on regardless of economic conditions. In uncertain times, investors often shift towards these sectors due to their steady revenues and consistent dividend payouts. This resilience makes defensive stocks a reliable option when concerns over market volatility rise.
Since September 2024, something strange has been happening: healthcare stocks have been falling while other defensive sectors have been rising during market uncertainty.
This goes against what we'd normally expect. Healthcare is typically considered a safe investment during troubled times because people need medical services regardless of economic conditions. Despite growing global tensions and economic worries that should benefit defensive investments, healthcare stocks have been selling off. This suggests there are specific issues affecting healthcare beyond the general market trends.
The healthcare sector has been declining notably since September 2024, with its biggest drop reaching -14.43%. During this same period, Consumer Staples and Utilities have shown different patterns, with Consumer Staples gaining 1.51% while Utilities have been performing well with gains of 9.94%.
This divergence shows investors are currently favoring utilities companies while moving away from healthcare, with healthcare experiencing the most severe decline among the three sectors. Potential causes include post-COVID overvaluation with inflated P/E ratios, investor preference shifting toward high-growth tech stocks, and ongoing financial challenges in healthcare such as labor shortages and rising costs.
By late summer 2024, just before the September downturn mentioned above, healthcare companies were trading at much higher price-to-earnings ratios than normal, meaning they had become expensive compared to their actual profits. Healthcare had delivered impressive cumulative returns of 65% from January 2020 to September 2024, significantly outperforming Consumer Staples (49%) and Utilities (38%) during the same period by around 22% on average.
The September shift marked a dramatic reversal from the sector's extended bull run, creating the unusual market divergence where healthcare fell while Utilities and Consumer Staples continued their upward trajectory. This market rotation away from healthcare stocks has left many investors reassessing their portfolios and watching closely for signs of stabilization.
Looking at the price-to-earnings (P/E) ratios, which show how expensive stocks are relative to their profits, healthcare reached an average P/E of more than 28 over the last 2 years. This was much higher than both Consumer Staples (24) and Utilities (20) during the same time. Healthcare's valuation exceeded the 20-year average for healthcare sector of 17.50 by about 62%, showing it had become significantly overpriced.
While healthcare valuations ballooned after pandemic-related investment, Consumer Staples and Utilities kept more reasonable valuations with overvaluations of 32% and 24% respectively. This pricing difference essentially valued healthcare companies like high-growth tech stocks despite their defensive classification, making them vulnerable to the price correction that started in September when investors began to reassess.
Investing in defensive stocks isn't automatically safe in all situations, as we've seen with healthcare's recent performance. Smart investors need to look beyond the simple "defensive" label and consider other factors like industry regulations, price valuations, how interest rates affect the sector, and potential policy changes.
Different defensive sectors can behave very differently depending on market conditions. A better approach is to examine company fundamentals, industry trends, and economic conditions rather than simply relying on historical patterns. Spreading investments across multiple defensive sectors, instead of putting everything in one area, can provide better protection when markets behave unpredictably.
Key Takeaways:
A Future Full of Promise Lies Beyond Today's Noise: Healthcare remains driven by powerful long-term trends such as innovation and an aging global population—factors that go beyond short-term market swings. This long-term momentum provides an opportunity for investors to stay focused on future growth while navigating current volatility. However, despite the recent selloff, we must continue to assess whether the sector remains overvalued at current price levels.
Our Steady Approach Keeps You Grounded: Our balanced investment strategy provides stability during market turbulence by diversifying thoughtfully across healthcare and other sectors. Balancing your portfolio allocation between defensive stocks (such as utilities, consumer staples), cyclical stocks (such as real estate, luxury goods), and sensitive stocks (such as technology, energy) helps your investment portfolio better withstand economic cycle changes. It's important to recognize that defensive stocks aren't automatically safe in all market conditions—at times, cyclical and sensitive stocks may actually offer better protection depending on economic trends, interest rate environments, and sector-specific developments. This approach minimizes short-term volatility, allowing you to focus on long-term goals with peace of mind.
Sources: Fidelity Clearing & Custody Solutions, S&P Global, CSIMarket, World P/E Ratio, MarketWatch, ETF.com, The Australian
Metta Associates's Strategic Reflection
While investors fixated on healthcare's negative headlines often sell at low prices, missing long-term opportunities, Metta Associates clients experience a distinctly different reality.
At Metta Associates, we focus on disciplined long-term financial planning through global, multi-asset strategies that emphasize value regardless of market conditions. This approach allows our clients to capitalize on emerging opportunities by acquiring quality investment below their intrinsic value, positions that will yield impressive returns when the market recognizes their true worth.
The healthcare sector now offers exceptional prospects despite post-pandemic challenges, with significant potential in biotechnology and medical innovation. Our value-driven strategy identifies these promising segments while positioning investments for future growth. With our emphasis on resilience and personalized planning tested against various scenarios, we help you navigate any market environment with confidence, ensuring your financial future remains secure where others see only risk. This difference is what transforms market volatility from a threat into an opportunity for lasting prosperity.
Always with You.
Disclaimer
This content is intended for general informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instruments. It does not consider your specific investment objectives, financial situation, or needs. You are encouraged to consult a licensed financial advisor before making any financial decisions.
The information presented is based on sources believed to be reliable; however, its accuracy or completeness cannot be guaranteed. This material does not represent a forecast and should not be interpreted as a guarantee of future outcomes. It has been prepared with care and objectivity to support long-term, planning-focused financial decisions.
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