With the third quarter of the 2024 earnings season underway, Wall Street is dealing with a changing stock market environment. The Federal Reserve has started its interest rate reduction cycle and market watchers are on the lookout for labor market and inflationary indicators to determine whether the Fed will be able to meet its goal of reducing interest rates by an additional 50 basis points by the end of this year.
Simultaneously, the shifting economic climate is also creating changes in the investment environment. High interest rates traditionally do not mean well for certain stock market sectors barring exceptional circumstances. Some sectors that don’t perform well in a high-rate environment include real estate, healthcare, and technology.
For two of these, this has been the case in the 2022 – 2024 Federal Reserve interest rate hiking cycle as well. Starting from real estate, the flagship S&P index’s real estate sector’s annualized three-year return is currently -2.66%. From its peak of 324.75 in December 2021, the index has lost 48.2 points or 14.8%. Similarly, the high-end healthcare and biotechnology sector does not fare well during high interest rates either. Since 2021’s close, the S&P’s pharmaceutical stock index is down by -0.84% while the S&P’s biotechnology index has lost a sizable 12.61%.
This brings us to our third stock market sector, a.k.a, technology. Technology, as you’re likely aware, has seen a lot of investor interest due to the surge in artificial intelligence. Looking at the performance of the S&P’s technology stock index, its performance also mirrors real estate and healthcare stocks before the frenzy around artificial intelligence started. Between 2021’s close and the market’s bottom in October 2022, the index had lost 33%. During the same time period, the real estate, pharmaceutical, and biotechnology stock indexes had lost 34.8%, 12.2%, and 30.5%, respectively. However, market optimism surrounding artificial intelligence has created a clear bifurcation in performance.
As an example, while real estate stocks have gained 29% since the October 2022 bottom and biotechnology stocks have added 25% in value, information technology stocks are up by a whopping 115%. This shows that tech stocks have delivered 4x the returns of both real estate and biotechnology. Driving this is artificial intelligence, with the shares of the world’s premier AI GPU designer up by 690% since OpenAI publicly released ChatGPT.
Looking at these shifts, the next question to ask is which stock market sectors might benefit from the evolving environment moving forward. On this front, investment bank UBS has some insights. In its Equity Compass Report issued in mid-October, the bank identifies key themes and trends for US and global stock markets. Within global and US stock market sectors, the bank has rated only one sector as ‘Most Attractive’. Unsurprisingly, this is the US technology sector which is currently experiencing a sustained surge of investor optimism courtesy of artificial intelligence.
The bank shares several data points to justify its optimism in the US technology sector, and more specifically, artificial intelligence companies. Citing data from the Hugging Face repository, a collection of software development tools, it reveals “an average 200% y/y rise for new AI models and model downloads combined so far in 2024.” UBS is also optimistic about the growing adoption of artificial intelligence in the US business world. AI adoption is key since big technology firms that have invested billions of dollars in AI need it to generate returns on their investment.
As per UBS, data from the Census Bureau’s Business Trends and Outlook (BTOS) survey released in September 2024 shows that AI adoption across the 1.2 million firms tracked was picking up the pace. “In the survey, 5.9% of companies reported using AI as of 3Q24, up from 3.7% in 3Q23,” outlined the bank in its report. Not only did 5.9% of the firms adopt AI, but the survey’s outlook for the next six months revealed that AI adoption across the surveyed population could rise by 2.8 percentage points to sit at 8.7%. Commenting on the implications of the higher adoption, UBS stated that “increasing future adoption will increase visibility on AI monetization, which is consistent with recent comments from leading cloud platforms.” The firms slated to benefit the most from this monetization are those ” with strong footprints in existing customer bases,” believes the bank.
These statements necessitate asking the question of which industries are slated to benefit the most from AI adoption. Fortunately for us, UBS also shares data for the industries currently leading the way with AI adoption and those that could grow adoption in the future. Right now, the information technology and personal services sectors are leading with AI adoption since as of September 2024, their respective adoption percentages were 19.1% and 14.7%. For the next six months, while the same industries are expected to lead the pack in overall AI adoption through their 23% and 19.8% percentages, others are expected to make higher percentage point gains. Two industries that stand out in the report are educational services and the finance and insurance industries.
As per the report, the former is expected to increase its AI adoption by 5.6 percentage points to 18.7% over the next six months from the current value of 13.1%. For the finance and insurance sector, it is expected to mark a 6.2 percentage point jump to 13.4% from the existing AI adoption of 7.2%. Of course, while AI is by far the most popular sector in the market right now, UBS also shares other attractive areas. It outlines that the market “also offers exposure to secular growth in longevity through various US medical device companies. Many US companies are also playing leading roles in the energy transition via electric vehicles, renewables, and energy efficiency.”
Our Methodology
To make our list of UBS stocks with improving quantitative indicators, we chose the firm’s top stocks that are seeing improvements in EPS growth, P/E ratio, and other indicators. Stocks within each sector were ranked by the number of hedge funds that had bought the shares during Q2 2024. The sectors themselves were ranked by the cumulative number of funds invested in the firms.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
HCA Healthcare (HCA): Weathering Storms and Navigating Healthcare Complexities
A team of healthcare professionals in lab coats and masks meeting at a hospital ward.
HCA Healthcare, Inc. (NYSE:HCA) is one of the biggest hospital and healthcare center operators in the US. The firm owns and operates inpatient and outpatient healthcare facilities that cover a wide range of medical specialties. Consequently, owing to the pricey and complex nature of the US healthcare industry, HCA Healthcare, Inc. (NYSE:HCA) depends to a large extent on its deals with public and private healthcare coverage providers. It also creates a climate-related angle to the hypothesis, since hurricanes disrupt its operations, increase healthcare costs, and reduce facility traffic. This was also the case in October when HCA Healthcare, Inc. (NYSE:HCA)’s shares dropped by 10.6% after it took a $50 million revenue hit from Hurricane Helene and missed analyst EPS estimates of $4.95 for Q3 by posting $4.88. However, the firm benefits from its vast network which provides it with key margin benefits and primes it for growing healthcare spending in America.
Baron Funds mentioned HCA Healthcare, Inc. (NYSE:HCA) in its Q2 2024 investor letter. Here is what the fund said:
“On the health care provider side, volumes remain healthy and labor costs have moderated. We continue to like HCA Healthcare, Inc. (NYSE:HCA), the best-in-class hospital operator with an attractive set of increasingly diversified assets in strong urban markets, where it is typically the #1 or #2 provider. Its strong operating cash flow and under-levered balance sheet provide flexibility to make growth investments and return capital to shareholders.”
Overall, HCA ranks 7th on our list of UBS’ top quant stocks in AI, IT, healthcare & other sectors. While we acknowledge the potential of HCA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than HCA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
