Gradually – and probably begrudgingly – analysts are beginning to temper their outlook for US equities and otherwise adopt an overtly cautious tone in the face of the burgeoning pandemic.
As tempting as it is to suggest Wall Street has been behind the curve when it comes to COVID-19, I would say that’s not really the case. I can cite at least a half-dozen pieces of research that contain worst-case scenarios right out of a Hollywood doomsday action flick and base cases positing a deceleration in Chinese growth that would have seemed unthinkable just two months ago.
The problem is that forecasting a recession or a dramatic decline in equity prices is almost by definition a poor call for the simple reason that recessions and dramatic declines are the exception, not the norm, which means making either your base case puts the odds against you as a forecaster.
You might say that a rapidly spreading, deadly virus is as good a reason as any to make dour predictions, and that might be true, especially in a world where supply chains are deeply integrated and financial markets inextricably bound up with one another, but the fact remains that the two most recent episodes of similar health emergencies did not result in apocalyptic outcomes, the regrettable individual pain they caused notwithstanding.
I continue to insist that the main risk at the current juncture stems from the fact that the virus comes at an extremely inopportune time.
As I put it elsewhere on Wednesday evening, there is never a “good” time for a pandemic, but the world is coming off a year during which global growth and trade was the weakest since the crisis. Thanks in part to misguided nostalgia for the mercantilism of a bygone era, global trade volumes contracted in 2019 for the first time since the crisis.
That makes the current situation (wherein global commerce is imperiled by quarantine measures and travel restrictions associated with the virus) all the more precarious.
With warnings from Apple and Microsoft (and others) now in the books, analysts are beginning to reassess.
Goldman, for example, now projects no profit growth in the US in 2020. The bank revised its estimate for S&P earnings to $165 this year and $175 in 2021, down from $174 and $183 previously.
Do note that the US is already in a mild earnings recession, with quarterly profit growth having contracted for two consecutive periods, albeit mildly.
Analysts were expecting a hockey-stick-like inflection in Q3 and Q4 to get bottom line growth back to solidly positive for the full-year.
Now, those projections are apparently set to be downgraded (no pun intended).
[As an aside, it’s also worth noting that Goldman projected an 11% hit to their original 2021 EPS target in the event the 2017 tax cuts are rolled back – in a Democratic election sweep, for example.]
The bank’s new forecasts include a serious contraction in Chinese economic activity this quarter, which will naturally dent demand for US products. Kostin (who showed up on Bloomberg TV Thursday morning) also factors in supply chain disruptions and a slowdown in the domestic economy (just days ago, Goldman’s Jan Hatzius cut his outlook for the US economy in Q1 to growth of 1.2%).
Kostin also reckons the S&P could fall to 2,900 in the near-term, but Goldman is sticking with their year-end target of 3,400 – for now anyway.
Meanwhile, SocGen’s Alain Bokobza sounded cautious too. “US equity markets have taken some time to start reacting to the potential economic consequences of the virus [as] the collapse in oil prices drove down US Treasury yields and altered Fed rate expectations [which] proved bullish for tech stocks, which are ‘long-duration’ equities, pushing them further into deeply overvalued territory, in line with our melt-up scenario (S&P 3,400)”, he wrote, in a Thursday note, before warning that “the rising risk of a full-blown pandemic, however, undermines the perception of the shock as transitory in nature [and] also calls into question whether lower interest rates will be enough to offset the inevitable earnings downgrades”.
And then there’s “Bernie risk”, which Bokobza also flags. “[If] Sanders’s success in the Democratic primaries continues, investors may start to evaluate the consequences of his presidential platform [including] taxes”, SocGen says.
The pool of potential negative catalysts for equities here is longer than the Colonial pipeline and about as translucent. Some analyst wrote yesterday about their fear of a sea-change in consumer psychology. Who had “sudden global consumer frugality” in their GDP forecasts last month? As earnings impact unfolds, when do companies decide they need to pause their buybacks and conserve cash till the dust settles? EPS growth flatline may be tomorrow’s bull case and next week’s impossible dream.
Flat growth in earnings this year at this point looks optimistic. So does 1.2% GDP growth for the first quarter. Boeing was set to drag down growth prior to any of this and the economy was struggling to grow at 2% before Boeing. The really interesting numbers are q2 and q3 when the full impact of this hit. Remember also China probably is not buying all those soybeans and LNG from the US after all. And a more proactive Fed (Greenspan, Bernanke or Yellen) probably would have already cut rates at least 25 bps by now. Our current FOMC is more reactive and is in danger of falling far behind the curve (no pun intended).