The rapid spread of the coronavirus has made equity strategists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. slash their outlook for U.S. corporate profit growth, as the epidemic erodes revenue and dents the global economy.
“Our reduced forecasts reflect the severe decline in Chinese economic activity in the first quarter, lower end-demand for U.S. exporters, supply chain disruption, a slowdown in U.S. economic activity, and elevated uncertainty,” Goldman strategists led by David Kostin wrote in a note Thursday.
More and more companies, including Apple Inc., Mastercard Inc. and United Airlines Holdings Inc., are starting to warn investors about the impact of the epidemic on their profit outlooks. The virus has reminded the world how exposed major U.S. corporations are to Chinese supplies and economic stability.
The Goldman strategists reduced their baseline earnings-per-share estimates by 5.2% to $165 for this year, representing zero growth, and cut the forecast for next year by 4.4% to $175, which indicates an increase of 6%. That compares with a prediction of a 7.9% advance in earnings in 2020 among companies in the S&P 500 Index, according to Bloomberg estimates, and 11% growth for 2021.
The U.S. stock market will fall another 7% from the Wednesday close in the near term as investor fears over the spreading coronavirus fuel a rush into U.S. Treasuries, sinking the yield to 1%, according to Goldman. However, by the end of the year, the S&P 500 will rebound to 3,400, which is about 9% above the current level, as lower bond yields will offset a reduction in earnings, they said. The benchmark extended its slump for the sixth day on Thursday, losing as much as 2.8%.
The strategists recommended investors shift to more defensive U.S. sectors in light of slowing economic growth. They raised real estate to overweight and utilities to neutral, while cutting industrials to neutral and lowering financials to underweight.
Goldman analysts weren’t the only ones slashing their earnings outlook on Thursday. Dubravko Lakos-Bujas, a strategist at JPMorgan Chase & Co., also trimmed his profit forecast, citing the negative impact from the coronavirus. Companies in the S&P 500 are now expected to earn $174 a share this year, down from $180 estimated earlier.
At the same time, Lakos-Bujas kept his year-end price target for the benchmark index at 3,400, saying global monetary and fiscal stimulus will likely continue to support equities.
“While it is easy to turn cautious on the market after a 10% drop, we argue investors should not discount the benefit of announced and unannounced global policy responses that are likely to outlast the impact of COVID-19,” JPMorgan strategists wrote.
The U.K., Switzerland and South Korea are among countries that reported new infections this week. The U.S. identified the first coronavirus case that doesn’t have ties to a known outbreak, as President Donald Trump assured Americans they face little risk.
–With assistance from Lu Wang.
— Ksenia Galouchko (Bloomberg)