Notwithstanding the overall strong Q2 results, we saw mixed feelings manifest here as well. An example: The two prominent makers of GLP-1 diabetes and weight-loss drugs had divergent earnings developments, yet they were punished equally in the market downturn.
Elsewhere, hospitals are advancing their post-COVID rebound as demand for procedures normalizes. Labor pressures are also starting to ease after pandemic-era nursing shortages. Hospital cost bases are improving as the need to hire temporary workers ebbs and nursing costs stabilize. One of our favored hospital holdings posted an unexpected 60% rebound in Q2 earnings and guided higher as strong procedure growth intersected with moderating cost trends. Makers of medical tools are knock-on beneficiaries, as now-profitable hospitals begin to spend on equipment.
Who suffers? Business fundamentals for managed care companies exhibited signs of stress in the quarter as the uptick in procedures led to higher costs and less favorable medical loss ratios, a measure of premiums earned relative to the amount insurers spend on medical claims.
Investment takeaway: Healthcare presents a story of bifurcation. Overall valuations are attractive and the earnings outlook is positive. Yet not all areas offer equal appeal. Big U.S. pharma companies, for example, represent risk as they face a looming patent cliff. But drug distributors benefit as patents expire and more generics come on the scene for distribution. And, pertinent to this year, drug distributors also tend to be relatively shielded from typical election-related volatility. Healthcare remains a favored sector across our global Fundamental Equities platform and, we believe, offers rich stock-picking potential.
3. Consumers: To shop or not to shop?
The answer: It depends. We’ve long noted signs of stress in the consumer, particularly the lower-income cohort. The cracks are seemingly widening today. A leading fast-food chain with a global footprint saw sales decline in the second quarter for the first time in more than three years. Management’s stated mission: Do better creating value for customers.
Years of high inflation are having an impact. Pricing power is coming into question as companies are having to adjust their prices to maintain demand.
The middle and high-end markets are generally stronger, but not immune. Even some luxury brands saw sales pressure as shoppers reined in spending on concerns of economic weakness. Makers of some big-ticket items like motorcycles and appliances cut guidance, and a major credit card company missed on top and bottom line.
Other instructive anecdotes: A leading home improvement chain showed no growth in Q2 after five consecutive quarters of earnings decline and signaled a continuation of the weakening trend on their earnings call. Meanwhile, America’s largest retailer and low-price leader posted strong Q2 results and raised its outlook ― a more positive read on consumer health but also evidence of value-seeking behavior and higher-end consumer trade-down.
The ultra luxury segment seems to be displaying the greatest resilience, benefiting from higher incomes and market gains bolstering investments.
Investment takeaway: Amid sorted signals on consumer health, we lean into companies with differentiated products and resilient pricing power. Strong brands with a faithful and income-secure customer base are relatively attractive. We’re comparatively cautious on companies catering to customers particularly impacted by still high interest rates.
Bottom line
Our clear message among the many mixed messages in today’s market is that stock selection matters. A deep understanding of industry dynamics and individual company fundamentals can not only be beneficial to investment outcomes, but also can offer some reassurance when bouts of market volatility like those we saw this summer test investor conviction.
