One of the longest US government shutdowns appears to be drawing to a close. Interestingly, much of the negotiation centred on healthcare. A bipartisan agreement seems to be forming to extend the Affordable Care Act by about a year. This is notable both for its policy implications and for what it signals to investors in the healthcare sector. Healthcare has long been one of the main political fault lines in Washington, and this latest compromise underscores how central the issue remains. Expect the debate over healthcare entitlements – a core Democratic achievement – to continue flaring up in the years ahead. After all, the topic has already been divisive enough to send thousands of civil servants on weekslong unpaid leave (though they are likely to be reimbursed eventually).
What does this mean for healthcare stocks?
From a market perspective, this compromise reduces one of the lingering uncertainties weighing on healthcare stocks. Tariff disputes have largely been settled, following agreements between major pharmaceutical companies and the government on drug pricing or commitments to expand production in the US.
Now, even the framework for federal healthcare support seems more predictable. Following a prolonged – and, at times, baffling – underperformance, this clarity prompted us to upgrade the sector, with a focus on pharma and biotech: key laggards that could benefit from a more stable policy backdrop.
US economy: Consumption dynamics are weakening
Higher inflation and weaker income growth are weighing on consumer spending in the United States. Due to the ongoing government shutdown, official data on private consumption and retail sales has been suspended since September. Alternative weekly data on retail sales confirms that consumer spending momentum weakened in September and October and was generally rather weak over the course of the year. This is compounded by deteriorating consumer sentiment, driven by pessimistic employment and income prospects. At the same time, purchasing conditions for large durable household appliances are considered poor due to high prices, while longer-term inflation expectations are declining.
We therefore expect consumer spending momentum in the US to decline further, especially if estimates of increasing job cuts and rising unemployment are confirmed. Assessing the situation in the US labour market is also made more difficult by the government shutdown. Moving forward, alternative data points to a rising unemployment rate, more job cuts, and stagnation in new job creation.
What does this mean for interest rates and your portfolio?
The weakening labour market and lower consumer spending suggest that the US Federal Reserve will cut interest rates further despite the elevated inflation rate of around 3%. The rise in prices for goods with a high import content is likely to be temporary, which justifies paying less attention to it than to the emerging economic risks. We expect further interest rate cuts by the US Federal Reserve at its upcoming meetings in December 2025, January, and March 2026. The interest rate cuts of 25 basis points at each meeting should bring an end to the restrictive monetary policy of recent years.
More broadly, last week’s sell-off acted as a healthy washout of the remaining exuberance in equity markets. From a technical standpoint, sentiment gauges now look sufficiently gloomy to clear the path for the traditional year-end rally. In fixed income, we are closing our tactical overweight in USD high-yield versus investment-grade bonds, since much of the fundamental strength has already been priced into riskier credit. This creates room to rebalance slightly towards higher-quality issuers.