Last year’s best performing stock market sector is this year’s worst performing sector. Health care stocks are being weighed down by the increased threat of regulation, gaining just 2% compared to the S&P 500’s 16% surge since the start of the year. The regulatory threat is even outweighing optimistic earnings expectations, as health care companies are forecasted to report the second-highest profit growth out of all 11 sectors of the S&P 500 in the first quarter, according to the Wall Street Journal

Regulatory concerns have dragged down health care stocks like CVS Health Corp. (CVS), Walgreen Boots Alliance Inc. (WBA), UnitedHealth Group Inc. (UNH), Humana Inc. (HUM), Cigna Corporation (CI), and Johnson & Johnson (JNJ). “Investors are scared about the massive amount of uncertainty in terms of regulation,” Brock Moseley, founder of Miracle Mile Advisors told the Journal.

Why Health Care Stocks May Keep Falling Longterm

  • Huge uncertainty about future;
  • Tighter overall drug relation;
  • Pricing pressure from Washington;
  • Democrats’ calls for Medicare for All;
  • Squeezed annual profits on falling generic drug rebates.

Source: The Wall Street Journal

What It Means for Investors

Concerns over regulation were renewed following the House Democrats’ presentation of the details of a Medicare for All bill. Outlined in February, the bill aims to create a new federally financed health-care system. Investors worry about how the bill could affect drug pricing and health insurance premiums. “There’s a critical eye around the health care space and drug pricing. These challenging trends do give us some worry,” Moseley said.

While the earnings picture remains positive for the health care sector overall, one area of weakness is pharmaceutical companies. Pharmaceuticals are expected to see earnings growth fall by 4% from a year earlier, making it the one industry out of the health care sector’s six industries that is expected to experience a decline, according to FactSet data as reported by the Journal.

UnitedHealth and Johnson & Johnson both reported earnings that beat expectations on Tuesday. Johnson & Johnson’s shares jumped to start the day, but pulled back to finish just slightly higher at the closing bell. UnitedHealth shares closed slightly lower. Both, however, will continue to face regulatory headwinds along with the rest of the sector.

Looking Ahead

As concerned as investors may be about the regulatory issues, health care stocks have traditionally offered investors growth opportunities and acted as safe havens in troubled times. While growth could be hindered by more stringent regulations, any pullback from this year’s market rally that causes investors to become jittery again might actually be a relative boon for the sector.