Markets Brief: Despite the Defensives Rally, Healthcare Stocks Are Good Value

Nvidia Earnings Boost Sentiment

Optimistic investors drove the Morningstar US Market Index 1.9% higher last week, capping a 6.4% gain over the month and returning the index to positive territory over the year to date. These gains were accompanied by better-than-expected economic data as the core PCE measure of inflation rose less than expected, while economic growth for the first quarter of the year was revised up to -0.20% from an initial estimate of -0.30%.

In addition, the Atlanta Federal Reserve’s model of current quarter growth rose sharply on Friday to 3.8%, well above both the previous estimate of 2.2% and the top end of consensus forecasts of 3%. The change was driven by a rise in net exports, partly reversing the high net imports that dragged economic growth lower in the first quarter as companies stockpiled overseas goods.

Corporate earnings also added to the positive mood, exemplified by Nvidia NVDA which reported an 69% increase in revenue over the previous 12 months, despite a $4.5 billion inventory write-off following a change in the rules on exports to China. You can find Morningstar’s take on the results here.

Fragile Optimism in Times of Trade War

More broadly, Treasury bond yields fell while the dollar rose slightly despite further twists and turns in the tariff saga. It seems that investors are increasingly unmoved by trade announcements from the White House in the belief that these will be subsequently walked back if asset prices decline. This benign perspective is likely to be tested over the coming months, as evidenced by the weekend announcement that steel tariffs will be doubled to 50%.

This Friday’s US jobs report will be closely watched for evidence that trade uncertainty is impacting hiring decisions. Economists expect the unemployment rate to hold steady at 4.2% with a slight increase in hourly wages. A substantial deviation from this outcome may affect the strong consensus that interest rates will remain unchanged at the upcoming meeting of the Federal Reserve Open Market Committee. You can keep track of this and the other economic news this week using this calendar.

Equity Havens Are No Longer Cheap

Given the economic uncertainty that has characterized 2025, it is logical that defensive sectors less exposed to the economic cycle have been favored by investors. Utilities have been the standout sector, up 11.5% this year, benefiting from a combination of low economic sensitivity and structural growth in power demand. Valuations now look stretched, with the average utility company trading at a 12.9% premium to Morningstar analysts’ assessment of its fair value.

Investors need to consider both valuations and economic characteristics when building portfolios. As valuations become stretched, the gravitational pull of a company’s fair value can overwhelm the benefits of its economic characteristics, diminishing its use as a portfolio component. To find out more about Morningstar’s view of the sector and the source of this overvaluation, check out the latest Utilities Industry Pulse.

Healthcare and Consumer Defensive Stocks

Consumer defensive companies have followed a similar path to utilities, rising 6.7% this year, and now appear expensive. The same is not true for the remaining defensive sector, healthcare, which has fallen 3.1% this year and now appears to offer unusually good value. Despite delivering the highest earnings growth of any sector in the first quarter of the year, healthcare companies remain beset by policy uncertainty such as the recent executive order intended to deliver dramatic price cuts.

This is a good reminder that companies are usually cheap for a reason. A company without meaningful challenges is unlikely to attract the negative sentiment that will drive prices significantly below their fair value.

Investors wishing to achieve returns above benchmarks must therefore be prepared to take on such risks when those risks appear to be overcompensated by the current stock price. To help you identify opportunities in the healthcare sector, Karen Andersen, Morningstar’s US research director for healthcare, has just published an outlook for the biopharma industry.