Goldman Sachs says the S&P 500 could quickly fall another 7% on coronavirus fears - and warns US firms won't generate any profit growth in 2020
- The S&P 500 is down 8% since February 21, and Goldman Sachs says the key index will continue dropping in the first half of the year.
- The bank estimates the S&P 500 will plummet to 2,900 - an additional 7% from Wednesday's close - before recovering through the end of 2020.
- US companies will fail to generate earnings growth in 2020 as the outbreak cripples Chinese economic activity, tears into supply chains, and weakens demand, Goldman analysts wrote Thursday.
- The bank upgraded its outlook on the real estate and utilities sectors and recommended investors shift to defensive strategies as the coronavirus epidemic intensifies.
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Rapid escalation of the global coronavirus crisis has driven an 8% sell-off in the S&P 500 index since Friday. Goldman Sachs thinks there's more room to fall.
The investment bank projected Thursday that further spreading of the deadly virus can push the US index to 2,900 in the near term. The estimate implies a 7% drop from the index's Wednesday close and assumes the 10-year Treasury yield falls below 1% as investors insulate from stock market shocks.
US firms will fail to grow profits through 2020 if the virus spreads further, analysts with the bank added. The dismal forecast accounts for a "severe decline" in China's economic activity, a slowdown in the US economy, disruption to global supply chains, and growing uncertainty concerning the epidemic.
If the outbreak escalates to a dire pandemic, Goldman estimates US company profits will shrink through 2020 before bouncing back the following year.
The bank raised its outlook on the traditionally defensive real estate and utilities sectors and lowered its rating for financials. Banks are more likely to face the "headwind of falling interest rates" as central banks respond to virus risks, the analysts said. Firms with strong revenue streams in the US are better picks than those exposed to global uncertainties, Goldman added.
"Pandemic risk is real and our basket of firms that are domestically-oriented will likely outperform companies with a high share of foreign sales," the team led by David Kostin wrote.
Goldman's updated baseline scenario assumes the virus' economic impact is sharp but "ultimately short-lived." The first half of 2020 will see production halts and weaker demand drag on global equities. Yet firms will recoup sales activity through the end of the year as the outbreak is contained and economies stabilize, the bank said.
Coronavirus is responsible for more than 2,800 deaths and has infected more than 82,000 people as of Thursday morning. The virus, which causes the respiratory disease known as COVID-19, has spread to more than 40 countries after originating in Wuhan, China.
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