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After a tough year marked by policy uncertainty and lagging fundamentals, healthcare stocks are set to change course in 2025, Citi says.
The firm points to better valuations for the sector, offering an attractive entry point after months of outsize valuations.
"What a difference a year makes. This past year's relative underperformance and flattish absolute return has gradually alleviated our valuation concerns," the analysts said in a Monday note.
The sector has lagged the overall market's rally this year, up just 1.1%, while the S&P 500 has surged 26.2% so far.
The analysts also point to subpar underlying fundamentals, which they say could reach a bottom soon.
"This has been our most persistent Underweight during 2024. However, valuations have right sized and fundamentals appear closer to an inflection," the analysts said.
Overall, they see the healthcare sector generating 19% earnings growth in 2025, compared to an expected 4% this year.
The analysts' call comes after a tough year for the industry amid significant policy uncertainty, particularly after president-elect Donald Trump's appointment of Robert F. Kennedy Jr. to head the Department of Health and Human Services.
Kennedy has been a vocal skeptic of vaccines. In the days after his nomination last month, vaccine makers like Moderna, Pfizer, Novavax, and GSK tumbled.
In the time since, though, some analysts have said the reaction is overblown, particularly for weight-loss drugmakers like Wegovy, and Ozempic maker Novo Nordisk and Zepbound maker Eli Lilly.
The selloffs "reflect more fear than real fundamental downside risk," BMO analysts argued in a note last month.
They said Kennedy's role comes with limited ability to change policy impacting the pricing and availability of the drugs, meaning there's likely little risk to the shares of companies like Eli Lilly and Novo Nordisk.
Citi's analysts seem to agree, forecasting returns of 64% for Eli Lilly, which carries the biggest weight in the sector at 12%.
"Although policy controversy remains, we think this is largely priced in," the analysts wrote, adding that pharmaceutical and biotechnology stocks will likely lead the sector's outperformance in 2025.
The analysts' call comes amid the firm's broader shift toward select defensive stocks. They say some cyclicals have rich valuations with little earnings growth seen in the near-future.
"Some classic Defensive industry groups look intriguing. Certain Cyclicals may need to buy some time as valuations are rich while an earnings growth turn is not yet visible," the analysts wrote.
