The rapid spread of the coronavirus (COVID-19) has spurred a wave of selling in the equity markets, with the S&P 500 Index down by about 9% in early afternoon trading from its 52-week, intraday high set on Feb. 19. That retreat has pushed the index to levels last seen in early December, and stocks face steeper declines if the virus spreads further. Goldman Sachs outlines the likely negative and broad impact of this trend on U.S. stocks in a new report.

Goldman forecasts: earnings for the S&P 500 will be flat in 2020; the S&P 500 will bottom out at 2,900, but recover to 3,400 by year-end; defensive stocks should outperform as global growth slows; and U.S.-focused stocks should outperform stocks with high international sales, as the U.S. economy holds up better than other countries.

Key Takeaways

  • Fears are rising that the coronavirus will become a global pandemic.
  • Goldman says S&P 500 companies will see no earnings growth in 2020.
  • The firm expects the S&P 500 to slide yet more, but recover by year-end.
  • Goldman recommends that investors favor defensive stocks and those with U.S.-focused sales.

The Coronavirus Threat

As of Wednesday, there were 82,164 confirmed cases of coronavirus (COVID-19) in 39 countries, resulting in 2,801 deaths, for a fatality rate of 3.4%, according to statistics from the World Health Organization (WHO) and the U.S. Centers for Disease Control and Prevention (CDC).

The CDC says the immediate risk to the American public appears low. But it adds that, should COVID-19 become a pandemic: "Schools, childcare centers, workplaces, and other places for mass gatherings may experience more absenteeism...law enforcement, emergency medical services, and transportation industry may also be affected. Health care providers and hospitals may be overwhelmed."

Impact on Earnings

Goldman has dropped its EPS estimate for the S&P 500 in 2020 from $174 to $165, for 0% growth from 2019. Meanwhile, the consensus estimate is calling for $176 in 2020, representing 7% growth. The report points to "the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, supply chain disruption, a slowdown in US economic activity, and elevated uncertainty." 

Path of S&P 500

The gap between the forward earnings yield on the S&P 500 (5.6%) and the yield on the 10-year U.S. Treasury Note (1.3%) is 427 basis points (bp), which is sharply above the long-term average. Goldman anticipates that, as fears about COVID-19 increase, the gap will reach 500 bp, but later narrow to 365 bp, as economic activity rebounds.

Focus on Defensive Stocks

Goldman has upgraded real estate to overweight and utilities to neutral. Meanwhile, they downgraded industrials to neutral, and financials to underweight, based on a slowing economy and falling interest rates.

Companies Issue Warnings

Nearly half of U.S. companies doing business in China expect revenue decreases in 2020 unless activity returns to normal by April. Among 169 companies surveyed, about 20% warn that revenue from China can be down by 50% or more if the epidemic lasts through Aug. 30. Apple Inc. (AAPL) is facing slowdowns in both production and demand in China, while The Coca-Cola Co. (KO) sees a hit to sales. Travel-related companies seeing or anticipating material negative impacts include Carnival Corp. (CCL), Expedia Group Inc. (EXPE), Hilton Worldwide Holdings Inc. (HLT), InterContinental Hotels Group PLC (IHG), United Airlines Holdings Ltd. (UAL), and also The Walt Disney Co. (DIS).