Analysts at Goldman Sachs believe the market may be underestimating the impact of coronavirus on corporate earnings and economic growth.
The novel disease has infected nearly 76,000 people, killing 2,130 in the process. Some scientists believe the actual infection rate is much higher.
U.S. stocks closed at record highs on Wednesday, with the S&P 500 Index returning nearly 5% year-to-date.
The record surge in stock prices leaves investors vulnerable to extreme downside risks as coronavirus threatens to disrupt everything from consumption to supply chains. That’s the main takeaway of a recent forecast by U.S. investment bank Goldman Sachs.
Goldman Sees Risk in Equity Valuations
Analysts at Goldman Sachs are worried that investors may be underestimating the impact of coronavirus. In a note to clients obtained by CNBC, analysts led by Peter Oppenheimer said:
We believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices.
The analysts added:
While a sustained bear market does not look likely, a near-term correction is looking much more probable.
In market speak, a correction is defined as a decline of 10% or more from a recent high. A full-blown bear market requires a plunge of 20% or more.
The large-cap S&P 500 Index closed at record highs on Wednesday. Year-to-date, the index is up 4.8%. | Chart: BloombergEconomic Impact of Coronavirus Already Being Felt
Investors weren’t always this complacent about the coronavirus risk. Equity markets plunged to start February after it became apparent that the virus was much worse than initially feared.
Markets in mainland China crashed 9% in their first session back from the extended Lunar New Year holiday. That was the biggest decline since August 2015.
Three weeks later, mainland stocks have fully recovered thanks in large part to emergency liquidity from the People’s Bank of China (PBOC).
Equities may have rebounded, but the real economy is still suffering from the coronavirus epidemic. Hundreds of millions of Chinese are under some kind of lock down. Inflation in January clocked in at eight-year highs, while housing sales crashed through the first week of February.
Government-affiliated research institutes, like the National Institute for Finance and Development, believe coronavirus will shave one full percentage point off China’s GDP growth this year. That’ll have a cascading effect on the global economy, with companies like Apple already reporting supply-chain disruptions.
Even Federal Reserve Chairman Jerome Powell conceded that coronavirus will disrupt the global economy, though the size of the impact isn’t fully understood yet.
Nearly 76,000 people have been infected with coronavirus to-date, according to official figures collected by Johns Hopkins CSSE. Many scientists believe the outbreak is much worse than Chinese officials are letting on. A peer-reviewed article appearing in The Lancet medical journal put the infection rate in Wuhan at 75,800. That was three weeks ago.
Disclaimer: The above should not be considered trading advice from CCN.com. The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Josiah Wilmoth.
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