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Healthcare Outperformance May Signal Short-Term Market Bottom

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The S&P 500 flirted with bear market terrain intraday on Friday as the index entered the -20% decline level from its peak in early January, only to see a last-ditch rally help to officially avoid the dreaded territory. Investors have been waiting for a sign of capitulation – a time when overwhelming selling pressure affects nearly all asset classes – so that the market can begin paving its way forward.

While many bear markets and corrections end with this type of brutal decline, it is certainly not true in every case. That’s why it’s crucial to look for other signs the market may be nearing a point of selling exhaustion, and we’re presently seeing one of them play out.

The healthcare sector is quite significant as it has the second-largest weighting in the S&P 500, trailing only technology. Healthcare accounts for approximately 14.2% of the overall weight in the widely-followed index, so keeping an eye on the performance of this sector is crucial during uncertain times.

Historically viewed as more a defensive sector due to its low correlation with global macro conditions along with its resilience to economic swings, healthcare can also be a considered somewhat of a growth play because of the high levels of innovation inherent in the space. Healthcare is also entering a seasonally bullish period.

The Health Care Select Sector SPDR ETF (XLV - Free Report) provides an effective representation of the healthcare sector within the S&P 500 index. XLV affords investors with the opportunity for more strategic or tactical positions at a more targeted level relative to traditional-based investing. The Health Care Select Sector SPDR ETF offers exposure to a wide array of companies such as healthcare equipment and supplies, biotechnology, life sciences, and pharmaceuticals.

Take a look below at the relative outperformance of XLV relative to the S&P 500 since the start of the year:

Image Source: StockCharts

Notice how the outperformance has picked up as of late. As healthcare constitutes a large percentage weighting in the diversified index, XLP’s relative movement may assist the S&P in forming a short-term bottom in the coming days and weeks.

The Zacks Large Cap Pharmaceuticals industry group is currently ranked in the top 37% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect it to outperform the market over the next 3 to 6 months. Digging a bit deeper, this industry group has a +5.81% return year-to-date versus a -17.65% loss for the S&P 500.

By targeting stocks within the best industries, we can provide a ‘tailwind’ to our investing success. Let’s take a look at a leading stock within this top-rated industry group.

Johnson and Johnson (JNJ - Free Report)

Johnson and Johnson researches, develops, and sells a variety of products in the healthcare field. The company’s Consumer Health segment offers skin health and beauty products under recognized brands such as Aveeno and Neutrogena; baby care products under the Johnson’s brand; pain relievers such as Tylenol and Motrin; and allergy products like Sudafed, Benadryl and Zyrtec. JNJ’s Pharmaceutical segment offers products for a host of disorders and diseases such as arthritis, HIV/AIDS, COVID-19, and many forms of cancer. Johnson and Johnson was founded in 1886 and is headquartered in New Brunswick, NJ.

JNJ has surpassed earnings estimates in each quarter for the past five years running. JNJ most recently reported Q1 EPS back in April of $2.67, a 2.69% beat over the $2.60 consensus estimate. The healthcare giant has posted a trailing four-quarter average earnings surprise of 5.41%. JNJ shares have advanced 6.03% this year while the market has been in correction mode.

Johnson & Johnson Price, Consensus and EPS Surprise

Johnson & Johnson Price, Consensus and EPS Surprise

The Zacks Consensus EPS Estimate for the current quarter stands at $2.55, which would represent a 2.82% growth rate relative to the same quarter in the prior year.

Keep an eye on JNJ as the stock continues to outperform.

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