While debate rages on about when the Federal Reserve might start cutting rates of interest, biotech industry analysts are making the case that the argument for stocks within the sector is growing. The central bank has held rates regular since last July because it patiently waits for more signs that inflation is cooling. But a reading on consumer prices in March released Wednesday dampened hopes that policy is about to ease. The market’s expectations are now pinned on September relatively than June or July, according to the CME Group’s FedWatch tool , a gauge of 30-day Fed Funds futures pricing. Last week, Morgan Stanley analysts noted that it’s the months leading up to an initial rate cut when biotech stocks outperform. Against this, the group actually tends to underperform within the initial period after rates are lowered, the Wall Street bank said. Indeed, the Nasdaq Biotechnology Index has risen about 14% since its October low. Morgan Stanley also believes the case for biotech stocks is further reinforced by the financing environment and the outlook for mergers and acquisitions in addition to upcoming innovation. .NBI 6M mountain Nasdaq Biotechnology Index over the past six months “Assuming rates trend on a downward trajectory, recent innovation delivers, and M & A continues, we see the potential for one more cycle of sustained outperformance for the industry,” the analysts wrote. The case for M & A The brisk pace of M & A at the tip of 2023 has continued in the primary quarter. Needham tracked 13 biotech deals through the latest three-month period. Analyst Joseph Stringer said the pace of dealmaking was well above the quarterly average of 8.2 deals dating back to 2018. Stringer said buyers have been favoring corporations with later-stage therapies in development, but more recent deals have included biotechs with earlier-stage treatments. That recent trend suggests there could also be a greater appetite for risk. “We expect M & A activity will remain above average for the rest of 2024 and skew more toward mid-stage goal corporations, with deal sizes within the $1-3B range and a selected concentrate on Oncology, Immunology, and Rare Disease,” Stringer said. He listed Phathom Pharmaceutical , Vaxcyte and Rhythm Pharmaceuticals as a number of the corporations he covers that are almost definitely to be acquired. PHAT 1Y mountain Phathom Pharmaceuticals shares over the past yr. Through Tuesday’s close, Phathom shares have rallied more than 31% for the reason that start of the yr, but analysts surveyed by LSEG predict the stock could surge nearly 89%, based on the common Wall Street price goal. The Recent Jersey-based company focused on gastrointestinal treatments recently received Food and Drug Administration approval of Voquenza for erosive esophagitis and associated heartburn. That is Phathom’s first product and it’s begun to promote it directly to consumers via commercials and other promoting. Needham said Phathom might have the ability to expand the label for the drug to non-erosive types of gastroesophageal reflux disease (GERD). Shares of Vaxcyte, which has been working on a pneumococcal vaccine, have gained 2% since January, as of Tuesday’s close. According to LSEG, analysts predict a median of 60% upside for the stock. RYTM 1Y mountain Rhythm shares over the past yr. But Rhythm shares are down more than 6% yr to date. LSEG said that every one nine analysts that cover the stock rate it a robust buy or a buy, with the common price goal equating to about 35% upside. The corporate has been working on Imcivree, a treatment for a hypothalamic obesity attributable to damage to the hypothalamus. There are currently no treatments for the disease. Morgan Stanley expects oncology and immunology to be the main target areas for corporations making acquisitions, while also anticipating that central nervous system and neuroscience will attract more attention in coming months. “Over the near-term inside our U.S. biopharma coverage we note [Merck ] continues to have the mix of need to offset the Keytruda [loss of exclusivity] and meaningful balance sheet capability …, and we see corporations across the sector remaining focused on bolt-ons ( < $5bn)," Morgan Stanley wrote. The analysts said that although AbbVie , Bristol Myers Squibb and Pfizer have recently struck deals, the three proceed to rank as among the many almost definitely acquirers within the medium term. The case for innovation Morgan Stanley also favors owning biotech stocks which have a robust drug platform even when the important thing catalyst of clinical trial data and FDA approvals are farther out. Rhythm ranks among the many stocks rated obese that Morgan Stanley favors on this category. Other stocks it likes include Intellia Therapeutics , a number one genome editing company, and Rocket Pharmaceuticals , focused on gene therapies for rare disorders. "The historical performance data ... indicate that corporations with money flows weighted to outer years (i.e., those further away from launches and revenues) typically outperform in low/declining rate environments..., which we imagine is sensible as those money flows are more sensitive to changes in discount rates," the investment bank's analysts wrote. —CNBC's Michael Bloom contributed to this report.