Markets suddenly price Eli Lilly shares for an earnings breakout

Nowadays, the market is sending mixed signals to virtually any investor who tries to participate today, squeezing a few percentage points of gains out of stock moves. With the Federal Reserve (Fed) proposing interest rate cuts this year and a FedWatch tool at the moment ECM Group NYSE:ECM now, pushing the likelihood of them occurring by May of this year, there are a lot of itchy fingers today.

Amid this uncertainty, some dollar investments may look to more “defensive” places like healthcare stocks and other stable sectors like Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP. These areas include companies that are relatively immune to the economic cycle, as they will always provide the products and services needed in any economic environment.

Eli Lilly and company NYSE: LLY has been priced in for a triumphant earnings announcement this week, which could bring with it a surprise breakout in the share price.

During uncertain times, it is not just the stability of an industry that attracts investors, but also the ability of a particular stock to grow to above-average levels when 10-year government bonds can approach a risk-free yield of 4%.

The money moves across the table

By analyzing market performance sector by sector, you will immediately notice that Selected healthcare SPDR fund NYSEARCA: XLV it has underperformed the broader S&P 500 index over the past 12 months.

This widening gap first appeared because 2023 favored hyperbolic growth alongside references to artificial intelligence (AI) during earnings calls. You can check out the massive demonstrations at NVIDIA Corp. NASDAQ:NVDA stocks over the course of the year, which continue to surpass all-time highs.

When markets aren’t sure what might happen, the volatility index (VIX) tends to pop up, as it did last week during the FOMC talks. When this happens, many institutions follow the mandate to move their money into low-beta stocks like Eli Lilly, which has outperformed the healthcare sector by as much as 95.2% over the past 12 months.

Markets are putting their money on the line, betting there’s still room to go higher. Analysts at Wells Fargo New York Stock Exchange: WFC AND Morgan Stanley NYSE:MS they’re in the same boat too, as they’ve increased their price targets on the stock over the last month.

More projections

Morgan Stanley raised its price target to $822 per share, showing 23.3% upside from today’s prices. For Wells Fargo, the stock has set a target of $700, which expects an upside of almost 5%.

These stimuli may have come after analysts realized the potential of money transfers hitting the sector with new investment inflows; however, the markets kicked them to the curb just as they do today. Eli shines as large-cap healthcare stocks are expected to grow EPS by an average of 14.8% over the next year.

The same analysts who expect an attractive upside in the stock’s valuation are predicting EPS growth of up to 97% next year, significantly above the industry average, which is why markets are willing to pay a premium valuation for the stock today, as seen in its P/E ratio of 51.6x, more than double the industry average of 20.5x.

While worthy competitors like it Pfizer Inc. NYSE:PFE could be a topic for consideration on your checklist, think about it. The market is discounting Pfizer shares by nearly 50% at its P/E of 12.2x, and price action would show the stock 61% off its 52-week high. Momentum has not favored Pfizer this year.

What to say AstraZeneca PLC NASDAQ:AZN? The company could be a decent option with its 21.9% upside to an $80 stock price target. Markets aren’t thrilled with this story, as they price it in line with the rest of the pack with its P/E of 16.0x.

All in all, there has to be a reason why, based on book price, investors are willing to pay as much as 54.2x for Eli Lilly stock; the rest of the peer group trades for just 6.0x book.

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