Market Update 4th August 2025

Half year results recap

Half year results have been flooding in. In the main, they have been positive, with plenty of upgrades coming through. According to data from FactSet, 82% of the large US companies that have reported so far have beaten estimates. That’s certainly encouraging, but we note valuation has also become more demanding as the market has recovered from the sharp correction in the spring. Lofty valuation makes investment selection particularly important.

Two sectors justifiably attracting a lot of attention are healthcare and tech.

The tech sector has enjoyed another strong quarter. Among the likes of Alphabet, Microsoft and Amazon, the big theme was continued monetisation of cloud solutions. Meta reported outstanding growth too. If anything tells us how the market has changed its attitude towards AI, it is the reaction to its expanding capex plans. When Meta first started raising its capital spending plans, the market worried about what the payoff would be. Meta’s ability to monetise AI has justifiably increased the market’s confidence, and these days, the reaction is to ask why Zuckerberg has stopped short of writing a bigger cheque in order to forge ahead in the AI race.

But at the same time, it has also contributed to a halo effect around the theme. Management teams in almost every sector are trying to convince investors that their strategy, powered by new technology, is a game-changer. My belief is that AI will lead to productivity gains across the board, and should drive revenue and margins higher in the years to come. Of course, not every glitzy tech stock will replicate Nvidia’s remarkable ascent. While advancements in tech should be a net positive, the task for investors today is to get to grips with the change and effectively separate the wheat from the chaff.

Healthcare also has plenty of moving parts, so has had more scrutiny than normal placed upon it. This is because of the political heat being applied. The White House is seeking to impose lower prices on many drugs, which together with the possibility of tariffs impacting the sector, has turned sentiment against the pharma groups. In addition to these factors, some medtech companies have been hurt by the federal research budget cuts. However, looking through results, one would not think there is much to worry about. Several large cap names have put through results with strong growth, and profit upgrades.

The combination of weak sentiment and increasing estimates means this is one of the few areas of the market where valuation has become relatively more appealing. As ever though, the importance of careful selection can’t be overstated. We have several healthcare names on our buy list, and believe each has an attractive pipeline of new compounds coming through the labs, as well as several years of reasonably consistent growth due to patent-protected profits. We also like healthcare funds, and have good relationships with fund managers who we like in the space.

The risk is of course that Trump gets his wish and pricing becomes a headwind in the US, which is the largest end market for most in the sector, or our old friend the tariff comes in to disrupt the state of play. The US has announced significant tariffs on Switzerland, a major pharm hub, and is set to impose 15% on EU drugs. However, many of the biggest groups have announced large spending plans to bolster their American operations. Nearshoring will help protect against trade friction. Note that in most cases, these spending plans are not stretching balance sheets or even necessarily changing capital allocation. Big pharma’s expenditure on R&D already extends into the billions, so to a large extent, these plans merely relocate existing funds.

Perhaps the bigger threat is on changing pricing models, which would ironically be even more urgent if tariffs come in, as tariffs would surely increase prices. Any change remains highly uncertain. Trump is not the first American politician to promise to reform the system to generate lower prices, he won’t be the last. He may yet get the overhaul he wants, but the legal battles will likely be fierce, and may require the next president to continue with his legislation. Time will tell.

Between them, these two sectors rather neatly embody the main themes in the market just now. Healthcare epitomises the increased uncertainty as a result of US government policy, while tech is the main reason the market’s valuation is being lifted higher. That is helped by the robust earnings growth its leading lights are generating, but the growth the big healthcare names are putting forward means they too have contributed to the market’s strong second quarter earnings season.

Clearly, challenges remain. Geopolitics, interest rates and potentially stubborn inflation to name just three in addition to those listed above. But with debt levels generally sensibly managed and robust results coming through, it is hard not to be impressed by how many companies are navigating these uncertain waters.

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George Salmon – Senior Research Analyst

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