Will Tax Reform Hurt Health Care Sector?

The health care sector played an important role in the recent bull market (SPX-INDEX) rally. The Health Care Select Sector SPDR ETF (XLV), which tracks the performance of the US health care sector, has risen 22% on a year-to-date basis as of December 21, 2017.

In the past one month, the ETF has returned 1.9%. According to a report provided by Goldman Sachs (GS), the technology and health care sectors will benefit the least from tax reform. According to its report, in the present situation, both the technology (XLK) and health care sectors pay the lowest effective tax rate of 24% and 26%, respectively. However, the energy (XLE) and telecommunication (VOX) sectors are paying the highest effective tax rate of 35% and 33%, respectively.

A major portion of revenues from companies in the technology and healthcare sectors comes from overseas. Because they already pay lower taxes on these overseas revenues, tax cuts might not boost their earnings as much. According to Goldman Sachs’s estimates, the health care sector’s earnings could grow by 1% in 2018, while the S&P 500 index’s overall earnings could grow by 5% after the tax reform.

Prominent hedge fund manager and famed short seller Jim Chanos said in a recent interview with CNBC that health care stocks will face some pullback due to tax reform.

In the next part of this series, we’ll analyze how tax reform will impact the technology sector.