Drugs, Oil and Cash: Why the U.S. Healthcare Industry Will Outperform the Energy Industry
The energy industry fuels mankind. We have built our modern world with coal, oil, gas, nuclear, wind, solar and other sources of energy. Meanwhile, great advances in medicine have made people around the world healthier than ever before. Today, both of these key industries are at a crossroads. What should healthcare and energy shareholders expect during this time of unpredictability?
While energy is transitioning toward sustainable energy, by bringing in investors with new capital, healthcare is expected to outperform energy over the next five years. This growth is caused by many factors, including the rapid development of groundbreaking new weight loss and diabetes drugs such as Mounjaro and Ozempic, advancement in AI technologies that benefit drug companies and surgical procedures and an aging population. In contrast, the energy industry faces challenges such as weakening demand for oil and gas, geopolitical risk, and growing investor preference for environmentally-centric stocks. For investors seeking stable and long-term growth, healthcare offers a more attractive opportunity.
The energy industry contributes 5.6% of GDP spending to the U.S. economy and holds 3.70% of the S&P 500 market share. It is gearing up for a transformation as it begins to reallocate its resources toward sustainable alternatives such as solar and wind energy. Due to the growing popularity of ESG securities, there is new capital and a growing demand for power and utility companies. Despite this sustainability push, electricity has higher demand due to the increasing reliance on AI, creating a complex dynamic within the industry. This can be well explained by a quote from Madhav Acharya, an advisor to the U.S. Department of Energy, “The challenge for the industry going forward is to find a way to recognize what might happen if you no longer need oil as a fuel, but you increasingly need it as a building block.”
The energy industry faces many challenges. Energy stands out as the only industry that is projected to decline in the S&P 500’s twelve-month forward revenue, indicating that it’s facing challenges such as lower demand, pricing pressures or market shifts that are likely to negatively impact its future earnings. The XLE, an ETF that tracks the energy industry in the S&P 500, has posted a 4.63% decline in the last year and a 3.11% drop in the last month, indicating recent struggles in the industry. The industry currently has a 13-16 P/E ratio, which highlights low investor enthusiasm. Natural gas futures have dropped 24.93% in the last three months and 14.49% during the past year. With electric vehicle (EV) demand surging, it is anticipated that by 2027, a third of the cars sold in the U.S. could be electric, slowing down the demand for natural gas even further. Investors are bearish on oil as Brent futures are at a 17-month low due to lagging demand growth in China, the world’s top crude oil importer, because of poor manufacturing data and risks of a regional war in the Middle East which include many countries that are key oil producers such as Iran and Iraq. Potential OPEC+ output bumps are on the horizon due to a surplus of oil supply. Industry forecasters predict oil futures may fall to $60 per barrel in 2025, even lower than the current $72, further fueling investor bearishness toward oil.
The healthcare industry accounts for 16.57% of GDP spending. It also holds about 12.26% of the S&P 500 market. The XLV, an ETF that tracks the healthcare industry in the S&P 500 has posted a 16.59% gain over the past year and a 3.39% increase in the last month. The industry currently has a 35.59 P/E ratio, indicating a bullish market. It boasts an estimated three- to five-year EPS growth of 19.27%, signaling optimism for future returns.
There is growing excitement around the new weight-loss diabetic drugs, Mounjaro and Zepbound, which are injectable GLP-1 drugs produced by Eli Lilly. Their surging demand could make a big difference to the industry and make Eli Lilly a $1 trillion company. Similarly, Ozempic and Wegovy, popular weight-loss diabetic drugs produced by Novo Nordisk, are gaining traction. Together, these drugs have a massive addressable market of 130 to 140 million people with either type two diabetes or obesity. Due to expected future rate cuts, biotech firms will have easier access to the capital they need to develop new drugs. Declining insurance rates and an aging USA population contribute to more hospital visits bolstering the industry. The advancement of AI will transform the healthcare industry by optimizing productivity, particularly in drug development. AI will also open the door to potential robotic surgery systems in the future, which could improve doctors’ ability to perform surgeries by allowing them to see images of the surgery.
However, the healthcare industry poses several risks to shareholders over the next five years. By 2030, several major U.S. pharmaceutical companies will lose their patent protection on up to 70% of their revenue. Estimates suggest the industry could face a $100 billion drop in revenue as a result. At the same time, U.S. pharma is confronted with price pressure related to the Inflation Reduction Act, which grants Medicare the authority to begin negotiating prices on select drugs. Lastly, many companies are still attempting to rebound from the “COVID Hangover” after a sudden influx of capital, which allowed them to make vaccines and treatments for COVID-19. But recently, the demand for these products has dramatically reduced, creating a more uncertain landscape for the industry’s future.
Photo caption: Healthcare growth has caused the rapid development of groundbreaking new weight loss and diabetes drugs, advancement in AI technologies and surgical procedures
Photo credit: Wikimedia Commons
