3 in 3: Health Care Is the Patient, and the Patient Is Stabilizing

Healthcare stocks are the patient, and right now the patient is stable. Why used car prices could be the inflationary canary in the coal mine? And what if we want to keep a human in the loop, but we just can't afford to? I'm Jim Lydotes and this is 3 Ideas in 3 Minutes. Let's flip over the timer, and let's go. 

1. Health care is stabilizing 

The most powerful upgrade in the world of equity investing is not from hold to buy. It's the upgrade from sell to hold. In that situation, maybe things aren't getting better, but they're not getting worse. When there's value in the group, not getting worse could be the sign to lean in. That's where I think we are right now in health care. 

Through mid April, health care was the worst performing sector in the S&P. It was the second worst performing sector in the Russell 2000. That made sense. They were in the crosshairs of tariffs and the crosshairs of drug price reform. A lot of concerns around government spending cuts. 

Right now I think things are starting to look a little bit better. We're starting to see hospital volumes up a decent amount in Q1. Biopharma funding was up sharply year on year in the first quarter. We're starting to see biotech IPO activity: Q1 was the strongest that we've seen in five years. Then finally, earlier this month, we got the final rate that the government will pay private insurers in 2027. That was up 2.5%, which was much better than people feared. This led to the start of a relief rally that I think could continue given all the value in the space. 

2. Used car prices are the canary in inflation coal mine 

Used car prices are the highest that they've been in three years. The impact of tariffs are now fully coming through to new car prices. The average price of a new car is $50,000. That's up over 35% over just the last five years. And borrowing rates are still high. So you're seeing a lot of trade down for the consumer, the stretched consumer from the new car market into the used car market. That's putting a lot of inflationary pressure on that part of the market. 

What’s important to understand is that it isn't demand inflation. That's inflation because people can't find any alternative. It does make you wonder what happens if you have hard goods inflating for all the wrong reasons. Used car prices in this situation is the poster child for that, but there are a lot of other areas. In that situation, what does the Fed do if inflation is rampant, but it's coming through for all the wrong reasons? 

3. AI spending could crowd out stronger hiring

What if AI comes for our jobs, not because it can replace what it is that we're doing every single day, but because companies need to fund all the money that they're spending to enable AI. 

The narrative before this year was that all of that AI spending was going to crowd out software spend. That was fine when AI spending was only about 10 % of IT budgets. Right now, AI spending is about 30 % of IT budgets. But that's not all. For every $1 that is spent in AI enablement at a corporation, there's an additional 40 cents of more compute, more hardware, more infrastructure. There's a real multiplier here. 

These numbers are getting too big to only crowd out software. It's very likely going to start to crowd out other things like hiring and jobs. So even if AI doesn't replace a single job this year, those jobs unfortunately may have to disappear anyway because somebody has to pay for all that spending. This is something that I think is going to be really critical to watch as we get through earnings over the next couple of weeks. 

That's our three points in three minutes with a little bit of sand left in the bottle. Have a great week and we'll see you all here next time.