2018 Bull/Bear Outlook Pfizer and Merck: Where Does Major Health Care Go From Here?

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Now that 2017 has come and gone, this raging bull market is now nearing nine years old. It is also the strongest bull market that most investors have seen in a long time, if not their lifetime. While 2017 realized gains of 25% in the Dow Jones Industrial Average (DJIA) and almost 19.5% on the S&P 500, 2018 could offer another year of this rally seeing similar numbers. Investors also should not ignore that the major stock indexes outperformed every single strategist’s expectations by a wide margin in 2017.

24/7 Wall St. just came out with its annualized forecasting bias for the stock market in 2018. It looks like DJIA 26,400 and at least 2,855 on the S&P 500 are now the baseline targets for this year. For the Dow to make its targets, health care stocks will to have to do their part to help. Pfizer Inc. (NYSE: PFE) and Merck & Co. Inc. (NYSE: MRK) only make up a combined 2.57% of the Dow’s price-weighted calculation rather than a normal market cap weighting, but these two stocks provide a clear look into the health care sector as a whole.

Looking ahead to the 2018 full year, analysts expect Pfizer to return 5.71% to investors, or a total of 9.46%, including its dividend yield of 3.75%. Analysts are calling for Merck to generate gains of 15.92%, or a total of 19.31%, including its dividend of 3.39%.

Both of these stocks are top plays in the health care sector, and although they lagged the markets in 2017, Pfizer and Merck are relatively cheap compared to the markets in general. Pfizer has a forward price-to-earnings (P/E) ratio of 13.79, and Merck has a P/E ratio of 13.35.

As far as what other strategists are calling for in the broader market, Credit Suisse is now targeting 3,000 and Oppenheimer is targeting 2,900 for the S&P 500 in 2018. At the end of 2017, the forward valuation for the S&P 500 Index was 18.5 times earnings to 19.0 times expected earnings per share according to two main sources.

Coming up for Pfizer, the firm has its fourth-quarter financial results due at the end of January. Thomson Reuters is calling for $0.56 in earnings per share (EPS) and $13.72 billion in revenue. The same period of last year had $0.47 in EPS and revenue of $13.63 billion.

Merck’s fourth-quarter earnings report is expected in early February as well. The consensus estimates are EPS of $0.94 and $10.48 billion in revenue. The same period of last year reportedly had $0.89 in EPS and $10.12 billion in revenue.

Merck has a 52-week trading range of $53.63 to $66.80 and a market cap of $153 billion. Its weighting in the Dow is 1.56%, but the rank is roughly 36th of the S&P 500.

Pfizer has a 52-week range of $30.90 to $37.35 and a market cap of $217 billion. Its weighting in the Dow is 1.01%, but the S&P 500 rank is about 21.