Goldman Warns “No Growth in 2020”

The market is down sharply again today after two already horrific trading sessions. If the Dow Jones Industrial Average closes on Friday where it opened this morning, it will have been the worst week for the index since the financial crisis.

The S&P and Nasdaq Composite could reach historic weekly losses as well if stocks continue sliding.

And according to Goldman Sachs, that’s likely to happen due to the “coronavirus effect.”

“US companies will generate no earnings growth in 2020,” said David Kostin, Goldman’s chief U.S. equity strategist, in a note to clients.

“We have updated our earnings model to incorporate the likelihood that the virus becomes widespread.”

“Widespread” in this case means more outbreaks in both North America and Europe. Since Monday, coronavirus fears have sent the Dow 8% lower. The S&P fell 8.6% while the Nasdaq Composite dropped only 2.9%.

“Our reduced profit forecasts reflect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, disruption to the supply chain for many US firms, a slowdown in US economic activity, and elevated business uncertainty,” Kostin said.

At present, the Dow lingers in correction territory, down 10% from its 52-week high. Last night, the CDC confirmed the first U.S. coronavirus case of “unknown origin,” discovered in Northern California. Stocks sunk in pre-market trading shortly thereafter.

Kostin continued, adding that “a more severe pandemic could lead to a more prolonged disruption and a US recession.”

Zero growth would, obviously, be terrible. Negative growth would be disastrous.

Especially at the peak of the longest modern economic expansion on record. The losses of the current week would pale in comparison to a recession-driven dip. It’s something investors are starting to realize.

As a result, they’re pricing-in zero (or even negative) yearly growth.

Goldman recommends shifting from stocks with majority foreign revenues to those that generate domestic earnings instead. Kostin’s prediction certainly sounds terrifying, and if he’s right, certain companies could do quite well amid the chaos.

But given what we know about the coronavirus, Kostin’s commentary remains pure conjecture. Nobody has a complete understanding of how damaging the coronavirus will really be, nor how long it will disrupt economic activity. In order to cause zero earnings growth, the outbreak will have to last at least until the end of Q2.

We’re not even two full months into the year and analysts claim they can already hear the “death rattle” of American business.

Kostin’s simply guessing at what’s going to happen. Sadly, no one has a crystal ball for these kinds of things.

Not even Warren Buffett, the “Oracle of Omaha” himself, who told investors to dive back into bullish positions on Monday morning.

If one of the most successful investors in history can get it wrong, so too can Goldman’s chief U.S. equity strategist.

Until we get a clearer picture of how the coronavirus is truly impacting productivity in the U.S., it might be a good idea to ignore panic-inducing statements. Stocks aren’t showing any indicators that the selling’s done, but that doesn’t mean they’re set for a 30% skid. Nor are U.S. companies displaying any signs that suggest flat 2020 earnings.

Not yet, at least.

If Q1 revenues come in lower than expected, then go ahead and lose composure. Everyone else will likely be freaking out, too.

But for now, the pricing-in of a “no earnings” year looks a little premature. A wicked rally could be waiting around the corner if sentiment shifts in the slightest.

My recommendation? Be ready if it does, because the “buying frenzy” that follows could put this week’s drop to shame.


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