The spreading coronavirus, which causes an illness known as COVID-19, is not only pummeling stocks and pushing Treasury yields to record lows but changing the outlook for those markets and the U.S. economy.
Goldman Sachs on Thursday revised its S&P 500 earnings outlook to zero for 2020 because of its forecast for a “severe decline in Chinese economic activity,” lower demand for U.S. exports, supply chain disruptions and slowdown in the U.S. economy coupled with “elevated business uncertainty.”
As bad as that sounds, it’s not the bank’s worst-case scenario. “The new baseline earnings forecast assumes the impact of COVID-19 on S&P 500 EPS is ultimately short-lived.”
If it’s not, U.S. GDP growth will slow further and U.S. stock earnings per share could plummet as much as 20% year over year, writes David Kostin, chief U.S. equity strategist at Goldman Sachs.
The S&P 500 closed Thursday down 4.4% at 2,978, more than 10% lower than its record high set just over a week ago, slipping into correction territory. The Dow Jones Industrial Average was off 4.4% at 25,766, down 12.8% from its record high set about two weeks ago.
The correction in stocks will contribute to an already slowing economy, raising the odds of recession, says Gary Shilling, a money manager and economist who correctly predicted the housing bubble that led to the 2008 Great Recession and the global inventory overhang that preceded the 1973-1974 recession.
“The next couple of months will mean a considerable setback in economic activity worldwide,” Shilling tells ThinkAdvisor. “Will the coronavirus come under control or be the trigger mechanism for a recession? With the world already growing so slowly, it doesn’t take much to tip into recession.”
Shilling had been expecting a recession for much of last year, then softened that forecast in late 2019 because the usual catalysts were missing such as excesses in the economy that would cause the Federal Reserve to raise interest rates.