Thursday's Top Sectors: Materials and Financials
Materials Sector Performance: The Materials sector is leading midday trading with a 1.5% increase, driven by Mosaic Co (up 6.7%) and Newmont Corp (up 5.7%). The Materials Select Sector SPDR ETF (XLB) is also performing well, up 1.9% for the day and 8.66% year-to-date.
Financial Sector Performance: The Financial sector follows closely with a 1.3% gain, highlighted by Elevance Health Inc (up 5.8%) and Hartford Insurance Group Inc (up 3.9%). The Financial Select Sector SPDR ETF (XLF) is up 1.8% on the day and 14.57% year-to-date.
Year-to-Date Gains: Year-to-date, Mosaic Co has increased by 6.63%, while Newmont Corp has surged by 170.77%. In the Financial sector, Hartford Insurance Group Inc has risen by 25.67%, while Elevance Health Inc has slightly decreased by 0.38%.
Overall Market Snapshot: In the S&P 500, seven sectors are up while two are down, indicating a generally positive market trend in the afternoon trading session.
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- Earnings Report: Humana is set to report its fourth-quarter earnings on Wednesday.
- Industry Challenges: The insurer and its competitors are facing challenges due to proposed Medicare Advantage payment rates, which previously led to a market selloff.
- Subpoena Issued: The House Judiciary Committee has subpoenaed eight health insurers, including CVS Health and Centene, requiring them to provide information related to subsidized ACA enrollees, indicating a strong focus on potential market fraud.
- Response Deadline: These insurers must respond to the subpoenas by February 23, reflecting the committee's strict demands for transparency and compliance, which could impact the operational strategies of these companies.
- Background of Prior Investigation: The subpoenas follow insufficient responses to a December request, highlighting ongoing regulatory scrutiny over potential fraud, which may lead to stricter oversight and compliance measures within the industry.
- Impact of Premium Increases: Millions of ACA enrollees are facing sharp premium hikes due to Congress's failure to extend COVID-era tax credits, potentially resulting in customer attrition and market share decline, prompting insurers to reassess their pricing strategies in response to market changes.
- New Drug Transparency Regulation: The U.S. Department of Labor has proposed a regulation requiring Pharmacy Benefit Managers (PBMs) to fully disclose their compensation to self-insured health plans, impacting approximately 90 million Americans, aimed at eliminating hidden fees and enhancing transparency in the healthcare system.
- Targeting Hidden Fees: The regulation specifically addresses PBMs' practices such as spread pricing, rebates, and clawbacks, aiming to reduce improper profits made by PBMs in drug transactions by mandating disclosure of these fees to protect employers and patients' interests.
- Market Reaction: Following the announcement of a mere 0.09% increase in Medicare payments, the market reacted sharply, with Humana's stock dropping over 13% and UnitedHealth nearly 9%, reflecting investor concerns about the industry's outlook amidst rising costs.
- Long-term Profit Pressure: For companies like CVS, UnitedHealth, and Cigna, PBM services are a significant revenue driver; the new regulation may compress their profit margins, leading to prolonged earnings pressure for these healthcare giants.
- Price Adjustment: The target price for Elevance Health's stock has been reduced from $425 to $400.
- Market Impact: This adjustment reflects changes in market conditions and expectations for the company's performance.
- Payment Increase Proposal: The Centers for Medicare and Medicaid Services proposed a mere 0.09% net increase in Medicare Advantage payments for 2027, significantly below the anticipated 4% to 6%, resulting in a $90 billion market value loss for the healthcare sector, highlighting the substantial impact of policy uncertainty on market dynamics.
- Earnings Risk Heightened: Analysts warn that if the proposed rates are finalized without adjustments, insurers could see a 15% to 20% decrease in earnings due to the disconnect between rising medical costs and flat funding, exacerbating profitability pressures within the industry.
- Bleak Industry Outlook: Although final rates are expected in April and historical trends suggest potential improvements, analysts predict the healthcare sector may enter a stagnation period of one to two years where earnings fail to expand as previously hoped, negatively affecting investor sentiment.
- Operational Improvements Overlooked: Despite UnitedHealth reporting quarterly improvements in profitability, the headline risk from the payment proposal continues to overshadow operational gains, with analysts noting that while progress is being made, significant recovery challenges remain.
- Chipmaker Strength: ASML reported record Q4 bookings of €13.2 billion, significantly exceeding the consensus of €6.85 billion, which boosted chipmakers and AI infrastructure stocks, enhancing market confidence in AI spending sustainability.
- Fed Policy Unchanged: The FOMC maintained the interest rate at 3.50%-3.75% as expected, with Chair Powell indicating strong economic performance without signaling imminent rate cuts, keeping market focus on future policy directions.
- Dollar and Gold Fluctuations: The dollar index rebounded after hitting a nearly four-year low, while President Trump's comments on dollar weakness pushed gold prices up over 3% to a new all-time high, reflecting increased demand for safe-haven assets.
- Economic Data Expectations: Initial jobless claims are expected to rise by 5,000 to 205,000 this week, and Q3 nonfarm productivity is anticipated to remain at 4.9%, indicating ongoing economic growth and potential market volatility.









