Healthcare tops Q1 2025 sector risk analysis

Investor pessimism and the rising threat of credit defaults sent healthcare to the top of S&P Global Market Intelligence's quarterly US public sector risk analysis.

Higher levels of risk in a sector can erode corporate valuations, potentially drawing private equity investors on the prowl for deals. Rising risk could also prompt private equity fund managers to delay exits in affected sectors.

In the first quarter, healthcare led all other sectors in average short interest across shares outstanding on US exchanges, a sign of bearish investor sentiment. The sector also scored highest on the probability of default metric. It only trailed the industrials as the sector most likely to see earnings guidance revised downward.

Private equity has seen signs of stress in its healthcare investments.

Twenty-seven private equity- or venture capital-backed US healthcare companies filed for bankruptcy in 2024, a record year for portfolio company bankruptcies. Only the consumer discretionary sector saw more private equity portfolio companies file for bankruptcy protection in 2024, with 29 seeking in-court restructurings.

Short interest

Average short interest ran highest in the healthcare sector in the first quarter, with 5.82% of outstanding shares sold short on average, up from 5.30% in the fourth quarter of 2024, according to S&P Global Market Intelligence data. Short sellers are betting on stock declines.

With 5.44% of outstanding shares sold short as of the end of the first quarter, consumer discretionary ran just behind the healthcare sector. While both saw quarter-over-quarter increases in their average short interest rates, the increase was greater for the healthcare sector.

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Probability of default

By one measure, the US healthcare sector's credit riskiness was at its highest level in more than a year. The median probability of default for listed healthcare companies at quarter's end was 6.90%, up from 5.71% in the preceding fourth quarter and higher than any other US public sector, according to Market Intelligence data.

It was the second consecutive quarterly increase in median probability of default, not just for the healthcare sector but for the communication services, consumer discretionary and real estate industries as well. The default risk for all four began rising in the fourth quarter of 2024 after falling in the preceding third quarter.

Healthcare also registered the largest quarter-over-quarter increase in its probability of default score, which climbed 119 basis points in the first quarter compared with the fourth quarter. It outpaced the 108-basis-point increase for real estate, which saw the second-largest quarterly rise.

Corporate guidance

Another sign of rising uncertainty in the healthcare sector's outlook is the stream of corporate guidance issued by listed companies, which shifted more pessimistic in the first quarter.

There were 30 instances of executive teams shifting their outlook during the period. In 12 cases, or 40% of the total, the updated guidance reduced future performance expectations, Market Intelligence data shows.

That marked an increase from the fourth quarter, when less than 31% of updated guidance from US-listed healthcare companies lowered expectations.

Industrials had an even more negative-skewing ratio of lowered-to-raised expectations in the first quarter, with 43% of new corporate guidance issued in the quarter cutting future performance expectations.

But the quarter-over-quarter trend for industrials was moving in the opposite direction, with updated corporate guidance more likely to raise expectations than the prior quarter.