A microcosm of overpriced stock markets

The issue with stock markets is not that they are broadly overvalued. The overvaluation is mainly concentrated in the largest AI stocks that also have the best growth. The problem is that if you want to diversify, the rest of your choices are often reasonably priced but have a much poorer growth outlook.

The US, in particular, is offering a "K" shaped choice:

• pay up for AI stocks with strong earnings growth
• buy more moderately priced stocks that are facing a weak consumer and weak earnings growth

I'm going to use vaccine makers as a microcosm of the choice. AI stocks are trading on close to 30x forward earnings. Vaccine makers, by contrast, are trading on single-digit price-to-earnings (P/E) ratios and paying dividend yields as high as 7%.

It’s a stark reminder that beyond the hype of artificial intelligence, much of the stock market still offers reasonable or even cheap entry points.

The Vaccine Sector: Value in Plain Sight

Among the most beaten-down areas of healthcare, the vaccine sector stands out. After a brief surge during the COVID-19 pandemic, many vaccine manufacturers have seen their share prices retreat to levels implying little future growth. Yet these same companies—Pfizer, GlaxoSmithKline, Sanofi, Merck, and CSL—remain deeply entrenched in global healthcare systems.

Most trade at around 10 times earnings, compared to AI leaders priced at three times that multiple. Dividend yields range from 3.5% to 7%, providing steady income while investors wait for sentiment to recover.

On the surface, this makes vaccine stocks appear like classic value opportunities: profitable, well-capitalized companies with long product histories and essential roles in global health. But to understand whether they’re true bargains, investors must first understand the unique industry dynamics that shape their valuations.

A Highly Regulated, High-Moat Industry

Vaccines are not like other pharmaceutical products. Because they are given to healthy people, regulators impose far higher safety standards than for drugs treating life-threatening conditions. That distinction shapes every aspect of how vaccine companies operate.

The industry’s caution stems from a pivotal moment in history: the Cutter Incident of the 1950s, when a defective batch of polio vaccines killed and injured hundreds. The tragedy caused several manufacturers to abandon vaccine production altogether, deeming it too risky.

In response, governments established liability shields and legal protections to ensure that manufacturers could continue producing vaccines without fear of ruinous lawsuits. This arrangement forged a lasting partnership between public health agencies and a small group of large pharmaceutical firms.

Today, that structure remains in place. The global vaccine market is dominated by Pfizer, Merck, GlaxoSmithKline, Sanofi, and CSL, alongside newer entrants such as Moderna and BioNTech that emerged from the pandemic’s mRNA breakthrough.

Barriers to Entry and Government Support

If the vaccine sector seems slow to change, that’s by design. Strict regulation and complex production requirements have created formidable barriers to entry.

Building a new vaccine factory typically costs around $1 billion, and obtaining regulatory approval can take years. These factors discourage newcomers and effectively protect incumbents from disruptive competition.

Governments also play a direct role in maintaining vaccine capacity. In some cases, they pay companies to keep idle production lines open in case of a pandemic. This arrangement, while costly for taxpayers, ensures preparedness and reinforces the stability of existing players’ business models.

As a result, the sector’s economics resemble a semi-public utility—steady, heavily regulated, and dependent on political goodwill. That stability, however, also creates vulnerabilities when politics turn hostile.

Politics and Profit: The New Threat Landscape

The vaccine industry’s reliance on government partnership makes it uniquely exposed to shifts in political mood. Today, that exposure is starting to bite.

Political Risk

Figures like Donald Trump and Robert F. Kennedy Jr. have brought vaccine scepticism and pharmaceutical distrust into mainstream debate. Their rhetoric poses several intertwined risks:

1. Legal Risk – If liability protections were weakened or repealed, vaccine makers could face crippling lawsuits.

2. Margin Risk – Political pressure to lower drug prices, particularly in the U.S., could squeeze profits.

Currently, American consumers pay roughly $130 per vaccine dose, compared to $60 in Europe. If the U.S. succeeds in forcing prices toward global norms, analysts estimate a 20–30% profit hit for the sector.

Sales and Public Trust Risk

Falling vaccination rates compound the problem. A mix of misinformation and complacency has led to a decline in inoculations in developed countries. Because the marginal cost of vaccine production is extremely low—often 50 cents to $1 per dose—even a small dip in sales can drastically cut profitability due to high fixed costs.

More broadly, declining public trust remains the sector’s biggest long-term challenge. Unlike pricing or regulation, lost trust can’t be legislated back overnight. It may take five to ten years, or another major outbreak, before attitudes shift again.

Technological Disruption: mRNA and the Future of Vaccines

Adding another layer of complexity, the rise of mRNA technology is transforming the vaccine landscape.

The COVID-19 pandemic gave mRNA a massive, real-world testing ground. The results proved that vaccines could be developed and scaled dramatically faster than with traditional methods. Processes that used to take 10–15 years might now take five years or less.

That speed is a powerful advantage for governments seeking rapid responses to emerging threats. But it also challenges older vaccine makers, whose manufacturing systems are slower and more capital-intensive.

Still, mRNA is not without risks. When vaccinating hundreds of millions of healthy people, even rare side effects can become statistically significant. Large-scale safety data is essential, and long-term effects are still being studied.

Looking ahead, the next battleground is likely to be a combined COVID-19, flu, and RSV vaccine—a single shot covering multiple illnesses. While efficient for consumers, such products may invite government price negotiations, as buyers argue that one combined vaccine should cost less than three separate ones.

Among traditional players, CSL is particularly exposed to mRNA disruption and has already postponed plans to spin off its vaccine division until market conditions improve.

The net effect

A vaccine sector has some large negatives:

• the potential for a generational erosion of trust in the US
• the potential for existing players to be sidelined by new technology
• possible significant changes to revenue or legal structures

On the flip side:

• it is a sector with very high barriers to entry
• it is a sector where most governments recognise that some of the money paid to these companies is a form of insurance against future pandemics
• companies generally pay high dividend yields
• the companies are cheap relative to where they have traded in the past

And to confuse the matter more, there are few pure-plays in the sector. When you buy a vaccine maker, you also get exposure to other healthcare areas.

The Core Question: What’s Priced In?

Markets are forward-looking, but they’re not always rational. The AI sector is priced for perfection—high growth, flawless execution, and endless demand. Any stumble could trigger sharp corrections.

Vaccine makers, on the other hand, are priced for disappointment. Political risks, falling vaccination rates, and mRNA competition are already embedded in their valuations. If even some of these fears prove overblown, the upside could be considerable—especially when investors collect 5–7% dividend yields while waiting.

Investment Strategy: Balancing Growth and Value

I'm viewing today’s market as a tale of two realities. On one side sits the AI-driven growth boom, expensive and crowded. On the other sits a range of undervalued, dividend-paying sectors—like vaccines—that have been left behind.

Our portfolios are structured to balance exposure across this divide:

Conclusion: A Healthy Dose of Balance

The healthcare and vaccine sectors may not have the excitement of AI, but they offer something the market is currently undervaluing: stability, cash flow, and time. In a world where only a handful of stocks drive index performance, these steady compounders provide diversification and income—valuable traits if momentum fades.

In today’s split market, investors don’t need to choose between growth and value. The smart move is to balance both—owning enough AI to benefit if the boom continues, while holding underpriced, high-yielding assets like vaccines that can withstand a downturn.

After all, in investing as in medicine, prevention is better than cure. A measured allocation to undervalued healthcare stocks (among other sectors) might just be the best vaccine against future market volatility.

These findings were originally featured on Episode 394 of Nucleus Investment Insights, where we explore the US healthcare sector, its stock valuation, and how do Trump & RFK Jr.'s policies affect their prices.

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