In the five days of the AI crash, the pharmaceutical sector only fell by 0.04%: what should we focus on next?

Last week, the S&P 500 fell by 2.70%, QQQ dropped by 4.98%, while XLV remained basically flat. On the first trading day after the midterm elections, XLV rose by 3.07%, and Moderna increased by 14.64% over the week. As AI trading begins to show significant divergence, the pharmaceutical sector is gaining funds for re-evaluation. For investors preparing to build positions, the most important thing now is not simply to judge "whether pharmaceuticals will rise," but to distinguish between large pharmaceuticals, biotechnology, and medical devices, and find the true catalysts for each.

1. Why has the pharmaceutical sector suddenly strengthened? First, look at "where the money is withdrawing from and where it is going"

The most obvious trading in U.S. stocks last week was the concentrated unwinding of AI assets. From November 2 to 6, SPY fell by 2.70%, QQQ dropped by 4.98%, and the Nasdaq fell by 5.52% on November 5. Chips, cloud computing, and high-valuation growth stocks became the main targets for selling, while XLV only fell by 0.04% for the week, XBI dropped by 2.42%, and IBB fell by 1.83%.

Caption: Weekly performance comparison from November 2 to 6. Moderna and XLV were nearly flat, while QQQ and Eli Lilly had significant declines. Red indicates an increase, blue indicates a decrease.

The real value of this data lies in proving that when the market begins to reduce positions in high-valuation assets, pharmaceuticals have achieved a higher capital retention rate. On the day of the Nasdaq crash on November 5, XLV still fell by 2.50%, and XBI even dropped by 6.73%, but in the following two trading days, XBI rose by 2.57% and 3.08%, respectively, and XLV also increased by 1.91% on November 9. Funds did not treat pharmaceuticals as a completely independent safe haven from the market, but rather returned more quickly after the panic.

Caption: Daily performance of XBI and XLV from November 2 to 9. Both rose on November 4 after the election, dropped sharply on November 5, and then XBI led the recovery for two consecutive days.

The midterm elections provided a new catalyst for this relatively strong trend. On the first trading day after the election on November 4, XLV rose by 3.07%, XBI increased by 2.67%, and IBB went up by 2.63%. The rise on this day is hard to fully explain by corporate fundamentals; it is closer to the market's anticipation of reduced policy risk.

The flow of funds also supports this change. On November 2, XLV had a net inflow of about $175.3 million, and on November 4, there was another net purchase of about $284.5 million, with an increase of about $1.1 billion in shares that week. In contrast, XBI had a net outflow of about $314 million over the past five trading days. This difference is significant: the market is willing to buy pharmaceuticals, but currently prefers to buy certainty first, rather than immediately betting on high-risk biotechnology.

Caption: XLV had net inflows at three points, with an increase of about $1.1 billion in shares that week. XBI had a cumulative net outflow of about $314 million over the past five trading days, with a single-day net inflow of about $30 million on November 5. Blue indicates net inflow, red indicates net outflow, with units in hundreds of millions.

Therefore, the first layer of logic in this market trend is already quite clear: after the reduction in AI trading congestion, funds are looking for new directions to support, and pharmaceuticals possess characteristics such as easing policy risk, strong certainty in the performance of some leading companies, and valuation structure differentiation, making it a sector that funds are willing to re-examine.

However, this only addresses "why to look at pharmaceuticals" and does not solve the most important question: if one is really ready to buy now, which category should be purchased?

2. Do not buy "pharmaceuticals" indiscriminately: three types of stocks, three sets of observation methods

The most common mistake ordinary investors make is seeing XLV outperforming the market and directly assuming that all pharmaceutical stocks will rise accordingly. In reality, the risk-return characteristics of XLV, XBI, and medical devices are very different, and they can even exhibit completely opposite trends within the same week.

Large Pharmaceuticals: The Certainty Route, Look at "Whether the Money Already Earned Can Continue to Grow"

This category can first focus on large companies like Eli Lilly (LLY), Johnson & Johnson (JNJ), and AbbVie (ABBV). Their advantage lies in having mature products, stable income, and strong cash flow, making them less volatile and more suitable for those looking to reduce portfolio fluctuations while still participating in the pharmaceutical trend.

However, large pharmaceuticals are not a blind buy either. Eli Lilly is a very typical case. The company reported third-quarter revenue of $24.397 billion, a 39% year-over-year increase, with Mounjaro sales of $10.723 billion, a 65% year-over-year increase. The full-year revenue guidance was raised from $85 billion to $87 billion to $91 billion to $92 billion, indicating very strong performance, yet the stock price still fell by 4.48% last week.

The reason lies in the market trading on "how good the performance is relative to expectations," rather than simply "whether the performance is good." Eli Lilly's stock price was already at a historical high before the earnings report, and the market had high expectations for the sales, pricing, and future growth of GLP-1 products. The earnings report showed that sales contributed 53 percentage points, but the actual price dragged down by 15 percentage points, indicating that the market will pay more attention to the quality of growth in the next phase, rather than just tracking revenue growth rates.

Therefore, if choosing large pharmaceuticals, ordinary investors should focus on three numbers: core product sales growth, whether the full-year guidance has been raised again, and whether the valuation has already reflected optimistic expectations. If performance continues to be revised upward, but the stock price has adjusted and the valuation has significantly decreased, it is usually more attractive than chasing after a new high.

Biotechnology: The Elasticity Route, Look at "Whether Catalysts Can Turn Future Value into Current Stock Price"

Many companies within XBI and IBB do not have mature profits and are even still in clinical stages, so they cannot be evaluated primarily by price-to-earnings ratios like Eli Lilly. For these stocks, what often determines the stock price are FDA reviews, clinical data, product approvals, commercialization progress, and cash reserves.

This is also why biotechnology cannot be evaluated solely on "the industry is strong." If a company is a year away from key clinical data and only has enough cash to last a few quarters, it may significantly underperform even if the entire XBI rises due to financing, clinical failures, or commercialization falling short of expectations.

Therefore, investors preparing to buy biotechnology should first create a very simple table: What is the next catalyst, when will it occur, how much revenue potential is there after success, how much cash does the company have, and how much will it drop after failure. As long as these five questions remain unanswered, it is not suitable to chase in because the sector suddenly rises.

Currently, XBI is still in a state of waiting for confirmation of funds, which actually means there is higher potential elasticity within it. If future fund flows into XBI shift from continuous net outflows to several consecutive trading days or weeks of net inflows, while the index breaks through recent highs, it would indicate that funds have truly begun to spread into high-elasticity biotechnology. For ordinary investors, this is much safer than chasing a suddenly surging clinical stock.

This week, companies with clear FDA or clinical milestones that can be put on the watchlist include TG Therapeutics, Scholar Rock, Liquidia, and Summit Therapeutics. The key here is to know in advance when events will occur and how much the market has currently priced in expectations. Buying in directly upon seeing FDA dates can lead to losses; the ability to judge whether to chase, wait, or sell only comes when the event actually happens.

Medical Devices: Valuation Recovery Plus Demand Improvement, Not Betting on a Single Drug

Medical devices are another route worth noting, focusing on "valuation recovery plus demand improvement," rather than betting on a single drug.

In the past week, IDEXX rose by 22.65% and Baxter increased by 12.09%, indicating that funds are not only switching between traditional pharmaceuticals and biotechnology, but medical devices are also beginning to show significant relative gains.

These companies have a very practical advantage for ordinary investors: they typically do not rely entirely on a single drug trial like clinical-stage biotechnology, nor do they require the market to continuously provide extremely high growth expectations like popular GLP-1 leaders. For those seeking more balanced risk-return profiles within the pharmaceutical sector, it is advisable to focus on medical device orders, hospital capital expenditures, product update cycles, profit margins, and free cash flow.

Therefore, if the investment goal is to find a medium-risk alternative direction after reducing AI positions, large pharmaceuticals and medical devices are often easier to understand than clinical-stage biotechnology. If the goal is to seek higher elasticity, then XBI and biotechnology companies with clear catalysts can be prioritized. None of these three directions is absolutely better; the key lies in what you are truly looking for: stability, performance growth, or event-driven high elasticity.

3. The policy window is improving, but do not mistake "negative factors being postponed" for a long-term bull market

One of the biggest valuation pressures on the pharmaceutical sector previously was the uncertainty of U.S. drug pricing policies. After the midterm elections, this variable is marginally improving. RBC's analytical framework suggests that under the new political landscape, the Democratic Party has more prioritized policy issues to address, making drug pricing legislation unlikely to be at the forefront in the short term. Meanwhile, the IRA has established a Medicare drug price negotiation mechanism, which will gradually expand in coverage, so there is no immediate need to push through new large-scale legislation to advance drug price negotiations.

The market is now more focused on ACA health insurance subsidies and Medicaid-related policies. If insurance coverage and payment capabilities are maintained, it may actually provide support for the overall healthcare industry. For pharmaceutical companies, this means that some of the policy risks that previously weighed on valuations have not further deteriorated for the time being. However, this logic must have a time limit. Institutions like Leerink judge that drug pricing issues may still become a policy focus again before the next presidential election. In other words, the current situation resembles a valuation recovery window after a decrease in policy risk, rather than a permanent shift in drug pricing policy.

For investors, this means there is no need to chase the entire sector high due to "policy benefits"; it is more suitable to use the upcoming months' earnings reports and policy milestones to filter for companies that can truly deliver performance. One policy milestone worth researching in advance is the reauthorization of FDA user fees. Related legislation needs to be completed by September 30, 2027. If the new bill mainly focuses on accelerating drug reviews and improving R&D efficiency—areas where bipartisan consensus can relatively easily form—it would be a potential benefit for biotechnology. If drug pricing provisions become an important component again, it means the current valuation recovery logic needs to be reassessed.

Thus, the greatest value of policy now is to provide pharmaceutical companies and investors with a time window for re-pricing. What truly determines how far this window can go is still the companies' profitability and cash flow.

4. Why did Moderna rise by 14.64% while Eli Lilly fell by 4.48%? The answer is "expectation gap"

To truly understand how to select pharmaceutical stocks in the next phase, the comparison between Moderna and Eli Lilly is more important than simply looking at ETFs:

Moderna's third-quarter revenue was $1.31 billion, a year-on-year increase of 29%, significantly exceeding the market's previous expectation of about $890 million. GAAP net profit reached $162 million, with diluted earnings per share of $0.38, while the market had previously expected a loss of $1.09. The company also raised its full-year revenue growth guidance from a maximum of 10% to 15% to 25%, and increased its year-end cash guidance to $8.1 billion to $8.3 billion, with R&D expenses down 27% year-on-year to $583 million.

This is a very typical fundamental reversal financial report: revenue exceeded expectations, losses turned into profits, cash increased, costs decreased, and full-year guidance was raised. For stocks that were previously expected to perform poorly, such changes are enough for the market to re-evaluate them. As a result, Moderna rose 14.64% in a single week, reaching a 52-week high of $267.50 during intraday trading on November 6.

Caption: The left image shows the weekly price change, with Moderna up 14.64% and Eli Lilly down 4.48%. The middle and right images show the actual third-quarter revenue values versus market expectations, in hundreds of millions of dollars. Light blue represents market expectations, while dark blue represents actual values.

Eli Lilly is exactly the opposite. Its performance is also very strong, but the market has long known it is strong. Third-quarter revenue was $24.397 billion, a year-on-year increase of 39%, with Mounjaro sales at $10.723 billion, a year-on-year increase of 65%, and full-year revenue guidance was also significantly raised. The problem is that the stock price was already at historical highs before the financial report, and the market demands it to continue providing higher growth rates.

This is the most important stock selection logic for pharmaceutical stocks now: do not just ask "Is the company good?" but ask "What price has the market already given it as a good company?"

For leading stocks that are already at high levels, if product sales continue to grow but prices start to come under pressure, market expectations are too high, and valuations do not decline significantly, then even if the next financial report is still good, it may not be able to drive the stock price up further. Conversely, a company that was previously undervalued, has just seen a profit reversal, improved cash flow, and has begun to raise guidance is often more likely to experience a valuation reassessment.

Therefore, ordinary investors looking at pharmaceutical financial reports can directly focus on four questions:

1. Did revenue exceed expectations?

2. Did profit exceed expectations?

3. Was full-year guidance raised again?

4. After the financial report, does the valuation still provide enough upside potential?

If the first three answers are "yes," but the fourth answer is "no," it is still possible to see "good financial report, falling stock price."

V. If you are preparing to build a position now, what should you do specifically?

For investors who have decided to build a position in pharmaceuticals, the risk of putting all funds in one direction at once is high. What needs to be considered is to first determine what kind of money you want to make, and then decide on the target.

If you want to be more stable and mainly earn from the industry regaining funding attention, you can first observe XLV and the large pharmaceutical stocks within it. The focus is on waiting for stock prices to provide a better risk-reward ratio after financial reports, policy changes, or market adjustments; the single-day rise on November 4 is not worth chasing. For high-expectation leaders like Eli Lilly, if profit expectations are still being revised upward after a pullback, it is more worth reassessing, rather than assuming any price can be bought just because the company is excellent.

If you want to take on moderate risk and seek valuation recovery, medical devices are worth studying separately. The recent strength of IDEXX and Baxter has already indicated that this line is starting to attract funding attention. What needs to be verified next is whether the rise is supported by fundamentals: are orders, revenue, profit margins, and free cash flow improving in sync? If it is merely driven by funds without fundamentals keeping up, the faster it rises, the more cautious one should be.

If you want to achieve higher elasticity, you can use XBI as an observation tool and then pick companies with clear catalysts from within. Here, do not chase single-day surges, but rather study FDA approvals, clinical data, or commercialization milestones in advance, and decide whether to participate after stock prices pull back, funds flow back in, or catalysts are confirmed. For companies in the clinical stage, how long cash can last is also important, as once financing is needed, stock prices may be diluted.

A truly executable method for building a position is to divide funds into several stages, rather than guessing a lowest point. Confirming the relative strength of the sector can establish an observation position. Confirming company financial reports or policy catalysts can increase the position. If performance continues to be revised upward and funds continue to flow in, then consider raising the position to the planned level. If XLV starts to underperform SPY, XBI continues to see outflows, or individual stock performance begins to fall below expectations, then one should stop adding to the position, rather than continuously averaging down just because they have already bought in.

Caption: Three steps to confirm sequentially. The sector first gives a signal, then individual stock catalysts increase the position, and finally, after confirming the trend, raise the position to the planned level. If any link weakens, stop adding to the position.

The benefit of doing this is that you do not need to accurately predict the lowest point of the pharmaceutical sector; you just need to let the market gradually prove your judgment through price, funds, and performance.

VI. What to watch next? Turn the pharmaceutical market into an executable observation table

Instead of focusing on "how much pharmaceuticals rose today," it is more worthwhile to pay attention to whether the following signals appear simultaneously.

If only XLV lights up in this table, it indicates that it is currently more suitable to treat pharmaceuticals as a defensive and observational direction. If XLV, XBI, and individual stock performance begin to improve simultaneously, it means the market is transitioning from "relatively resilient" to "actively rising."

This is also something that ordinary investors should avoid the most right now: do not mistake "pharmaceuticals have recently fallen less" for "the upward trend has been confirmed." The signals that are truly worth adding to the position are when the sector outperforms, funds flow back in, and company performance improves, all three factors begin to overlap.

If you have already determined to build a position in U.S. pharmaceuticals, you can now list target companies and price ranges, and confirm account funds and trading permissions in advance, rather than waiting until financial reports or FDA results come out to start looking for stocks. Under the premise of meeting applicable qualifications and jurisdictional restrictions, BIT provides trading services for qualified users in U.S. stocks, supporting XLV, XBI, and U.S. pharmaceutical stock trading, and supports stablecoins and traditional wire transfers as funding methods.

VII. In conclusion: The most valuable aspect of pharmaceuticals now is repricing

Last week, pharmaceuticals only fell 0.04%, which certainly cannot directly prove that a pharmaceutical bull market has begun. But it at least completed an important test: when AI and high-valuation growth stocks faced concentrated selling, funds did not flee pharmaceuticals on a large scale, but instead began to seek new certainties among large pharmaceuticals and some healthcare companies.

The midterm elections temporarily pushed policy pressures to the back seat, and the performance of companies like Moderna began to provide new fundamental catalysts, while medical devices and biotechnology await further confirmation from funds. With several factors overlapping, pharmaceuticals are transitioning from a purely defensive sector to a candidate direction for serious funding research.

However, this does not mean that "pharmaceuticals" can now be treated as a buying reason. If you want to be stable, look at the profits and valuations of large pharmaceuticals. If you want to do valuation recovery, look at the orders, profits, and cash flow of medical devices. If you want high elasticity, see if funds are truly flowing back into XBI, and then pick companies with clear FDA or clinical catalysts.

The signals for building a position may not be complicated: XLV continues to outperform SPY, which is a sector signal. XBI funds turning from outflows to continuous inflows is a risk appetite signal. Individual stock performance and guidance continuing to be revised upward is a fundamental signal. The closer the three are, the higher the win rate.

Therefore, the most worthwhile trading logic in this round of the pharmaceutical market is that funds are actively seeking certainty, and the pharmaceutical sector has already begun to tell the market where the next money should flow.

Disclaimer: The content of this article is for general information and market commentary only, compiled based on publicly available information as of the time mentioned in the article. Relevant market data, expectations, and probabilities may change with market conditions. The views and investment strategies cited from third-party institutions, analysts, or other individuals only represent the views of the relevant third parties at a specific time and do not represent BIT's views or recommendations. This article does not constitute investment advice, investment research, solicitation, or recommendation for any securities, investment products, or trading strategies, nor should it be the basis for any investment decision. Financial markets carry risks, and securities prices and market performance may fluctuate; past performance and historical market trends do not represent or guarantee future results. Investors should independently assess relevant risks based on their own circumstances and seek professional advice when necessary.