With earnings season now in swing, it looks as though the state of the healthcare market is "more of the same." Company executives have managed Wall Street expectations such that companies are technically posting above-expectation earnings, but a lot of this outperformance seems to be coming from lower tax rates, "other income" and lower operating spending. Overall revenue growth is still not impressive, and with the market-beating returns seen across the sector so far this year, there could be some risk to these stocks if revenue growth doesn't accelerate towards the end of the year.

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Procedure Trends Still Pretty Soft in Devices
Looking at the earnings reports of Johnson & Johnson (NYSE:JNJ), Abbott Labs (NYSE:ABT), Stryker (NYSE:SYK), St. Jude Medical (NYSE:STJ) and Intuitive Surgical (Nasdaq:ISRG), it looks as though overall procedure growth has still not substantially recovered.

Intuitive Surgical seems to be seeing some impact from austerity measures in Europe (the company's robotic surgical instruments lead to higher-than-normal procedure costs), as well as declines in prostatectomy procedures in the U.S. that may be due to a more conservative overall approach to prostate cancer care.

SEE: Countries With The Highest Healthcare Spending

For the larger companies, procedure numbers for general surgery, ICD implantation and stents don't look especially strong either. In fact, the surgery-related numbers for J&J looked quite weak. With companies like Bard (NYSE:BCR), Covidien (NYSE:COV) and Boston Scientific (NYSE:BSX) reporting this work, investors will get valuable incremental data points on the overall health of the market. On the other side, while Stryker's European orthopedics business looked soft, orthopedics finally seems to be posting its long-awaited recovery.

Capital Equipment
Stryker, a major seller of capital equipment, including hospital beds), saw a sizable slowdown in business this quarter. Intuitive Surgical, though, posted solid system placements - suggesting that even if prostatectomy procedure counts are slowing, the daVinci system remains a high-priority use of funds. Look to the later earnings reports of Hologic (Nasdaq:HOLX) and Varian (NYSE:VAR) for more color on the capital equipment environment.

SEE: Investing In The Healthcare Sector

Few significant drug companies have reported earnings yet, but many of the major Big Pharma names are due to report this week. Although Abbott posted very solid numbers on the back of strong pricing actions with key drug Humira, such strong pricing leverage is likely to be more the exception than the rule.

Diagnostics continues to look like a relative area of strength. Abbott's numbers were solid, as were the reagent sales numbers for Cepheid (Nasdaq:CPHD). Although JNJ's overall diagnostics numbers were weak, this business has been losing share for some time now, and both JNJ and Abbott reported solid trends in the diabetes market (one of the largest segments of diagnostics).

SEE: Healthcare Funds: Give Your Portfolio A Booster Shot

The Bottom Line
Healthcare stocks continue to outperform this year. The Health Care Select Sector SPDR (NYSE:XLV) is up 7.6% year-to-date, beating the 5.7% return of the S&P 500. The iShares Dow Jones US Pharmaceuticals ETF (NYSE:IHE) is up 12.7%, while the iShares Dow Jones US Medical Devices ETF (NYSE:IHI) is up 3.9%. The SPDR Biotech ETF (NYSE:XBI) has risen 36% year-to-date.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: JNJ, SYK, STJ, ISRG, ABT, BSX, COV, BCR, HOLX, VAR, CPHD, XLV, IHE, IHI, XBI

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