Bearish investor sentiment and a rising possibility of default pushed the healthcare sector into the spotlight in the second quarter, according to S&P Global Market Intelligence's latest quarterly analysis of US public sector risk.

A higher level of apparent risk can pull down valuations across a sector and is a key consideration for private equity. For would-be private equity acquirers, it can be a signal to search for discounted entry points. Risk can also prompt private equity sponsors to delay exits from portfolio companies until valuations recover.

In the second quarter to June 27, average short interest in US-listed healthcare stocks continued to rise as more investors bet on stock price declines. Healthcare also had the largest quarter-over-quarter increase in credit risk versus the median across all sectors.

Private equity investment in healthcare services, which is a driver of the overall healthcare industry, was pacing for a rebound in early June after falling sharply in 2023. But signs of stress emerged in an early 2024 review of private equity portfolio company bankruptcies, which uncovered a dozen in healthcare, more than twice as many as any other sector.

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Short sellers

Investors remain the most skeptical about consumer discretionary sector stocks, which have topped the average short interest rankings since at least the first quarter of 2023, according to Market Intelligence data.

The healthcare sector narrowed the gap in every quarter since then and ranked just behind consumer discretionary in the second quarter, with 5.20% of outstanding shares sold short on average.

Default risk rises

The probability of default for listed healthcare companies versus the median jumped 32 basis points to 7.03% in the second quarter, according to a Market Intelligence analysis.

It was the highest probability of default estimate for the sector in at least five quarters.

Adjusted outlook

Lowered corporate guidance — management's downward revisions of forward future earnings expectations — showed the largest increase among healthcare companies with a nearly fourfold rise from the prior quarter, Market Intelligence data shows.

Health insurer Humana Inc. recently cut its earnings-per-share prediction for 2024, citing challenges in the Medicare Advantage market, rising costs and regulatory issues. Reduced post-pandemic demand factored into lower revenue guidance from vaccine manufacturer Novavax Inc.

Healthcare companies as a whole, however, are trending toward optimism. Corporate guidance was raised 51 times in the second quarter to June 27, more than double the previous quarter.

Management in the IT sector, by comparison, appears less optimistic. Downward revisions accounted for more than 39% of all new corporate guidance issuing from the IT sector in the second quarter, compared to 29% for the healthcare sector.