Investor patience tested as pharmaceutical stocks take a tumble

Key Points

• The Health Care Select Sector SPDR Fund has dropped 3.81% in the last month and 8.03% in the past three months.
• Pharmaceuticals' weak earnings reports are contributing to the healthcare sector's recent underperformance.
• Bristol Myers Squibb, AbbVie, Merck, Johnson & Johnson, and Pfizer all traded below previous highs due to earnings concerns.

The Health Care Select Sector SPDR Fund NYSEARCA: XLV was down 3.81% in the past month and 8.03% in the past three months. The latest round of pharmaceutical stock earnings isn't helping sector performance.

S&P 500 components Bristol Myers Squibb Co. NYSE: BMY, AbbVie Inc. NYSE: ABBV, Merck & Co., Inc. NYSE: MRK, Johnson & Johnson NYSE: JNJ and Pfizer Inc. NYSE: PFE are all trading well off their previous highs. Earnings reports put a dent in those stocks. 

Amgen Inc. NASDAQ: AMGN gapped down at the open on October 31 and was trading 3.78% lower midway through the session. 

The decline came even after Amgen handily topped analysts' views, which MarketBeat's Amgen earnings data show. The company also increased its revenue forecast. 

For the full year, the company raised its revenue estimate to a range between $28 billion and $28.4 billion, above an earlier forecast of $26.6 billion to $27.4 billion. It also narrowed its earnings estimate to a higher range of $18.20 and $18.80 a share, versus a previous forecast of $17.80 to $18.80.

Horizon revenue causes Amgen selloff?

Amgen recently completed its acquisition of Horizon Therapeutics. That acquisition may have played a role in the stock's selloff on October 31, as investors fretted that Amgen's revenue forecasts are due to Horizon instead of organic growth. 

That may seem like nitpicking, but the Horizon revenue was modeled into analysts' forecasts long ago. Now, they want to hear about new growth, not something they're already expecting. 

Amgen stock is up 11.35% in the past three months. 

The broader sector has been given a boost by Eli Lilly Co. NYSE: LLY, whose tirzepatide obesity drug has delivered a boom in sales and sent the stock's price 23.63% higher in the past three months. 

Lilly is the biggest price gainer in the financial sector in the past three months. 

Eli Lilly forecasts revised higher

The company reports third-quarter results on November 2 before the market opens. If you take a look at the Eli Lilly earnings page, you'll see that the company beat revenue expectations in the past two quarters but missed earnings views two quarters ago.

Wall Street expects earnings to grow by 23% this year and another 29% next year. Those forecasts were revised higher recently. 

Denmark's Novo Nordisk A/S NYSE: NVO is up 22.72% in the past three months on the strength of diabetes and weight loss drugs. However, Novo Nordisk is not part of the S&P 500, so that's not helping the U.S. large-cap sector performance. 

A big healthcare decliner in the past week was French-based Sanofi NYSE: SNY, which cratered to the tune of 19.13% in the aftermath of its quarterly report. That wiped out $20 billion in market value in one fell swoop. 

Using MarketBeat's Sanofi earnings data, you can see that the company missed revenue views. Guidance was also lower than anticipated.

Healthcare trading higher with the broader market

Taken in total, the pharmaceutical selloff doesn't look likely to rebound soon, despite the XLV ETF rallying on October 30 and October 31. Healthcare was trading higher along with the broader market, as you can see on the SPDR S&P 500 ETF Trust NYSEARCA: SPY chart. 

In addition, an investing myth is being busted right now: Pharmaceutical stocks are often considered defensive safe havens due to their resilience during economic downturns. While it's true that these companies provide essential healthcare products, and demand for medications remains relatively stable regardless of economic conditions, we now see how investors can lose patience with these companies, just as they can with any other sector. 

A sell-off in the pharmaceutical sector is problematic as it can erode investor confidence, affecting research and development funding for future innovations. However, that condition would have to last for months for investor confidence in healthcare to truly break down.

At this juncture in the market, the tried-and-true defensive play, utility stocks, as tracked by the Utilities Select Sector SPDR Fund NYSEARCA: XLU, which is up 2.85% in the past five days, making it the leading sector performer.