The rapidly spreading coronavirus is set to wipe out profit growth for U.S. companies this year, according to Goldman Sachs.
The outbreak will result in S&P 500 earnings holding at $165 per share in 2020, down from a previous estimate of $174, the Wall Street firm predicted.
“Our reduced profit forecasts reflect the severe decline in Chinese economic activity in the first quarter, lower end-demand for U.S. exporters, disruption to the supply chain for many U.S. firms, a slowdown in U.S. economic activity, and elevated business uncertainty,” wrote David Kostin, chief U.S. equity strategist at Goldman.
The coronavirus, which originated in Wuhan, China, has sickened at least 81,109 people globally and killed 2,762, according to the latest figures from the World Health Organization.
Hundreds of millions of people have been locked down in China, paralyzing supply chains and causing companies to temporarily shutter their doors or reduce operations. Additionally, airlines have canceled flights to and from China, schools have been closed in Japan and Saudi Arabia has canceled pilgrimages to Mecca and other holy sites.
The fallout has run deep among U.S. companies that do business with China, particularly among those that rely on production inside the country.
On Wednesday evening, Microsoft warned that delivery of parts for its personal-computing unit, which accounts for about one-third of revenue, has been impeded more than previously expected. The warning follows similar comments from tech giants Apple and HP, and may be just the beginning.
The 20 largest contributors to S&P 500 earnings, which account for a third of earnings, trace roughly 18 percent of their inventory costs to Greater China and 3 percent to both South Korea and Japan, Kostin wrote. Notably, South Korea has the second-most confirmed cases with 1,261, according to the WHO.
While supply-chain issues are top of mind for some companies, others -- including Canada Goose, Estee Lauder and Ralph Lauren -- are worried about the outbreak curbing foot traffic in stores and damaging consumer demand.
Chinese consumers, many of whom have been sidelined by the virus through either the temporary closing of stores or the grounding of U.S. flights into and out of the country, accounted for 33 percent of spending in the global luxury market in 2018, according to the management consultancy Bain & Co.
Kostin says the gap between yields for the U.S. 10-year Treasury and corporate earnings is about twice its usual size, suggesting that if the 10-year falls to 1 percent, then the S&P 500 will fall to 2,900 before rebounding as the end of the year approaches.
“A scenario where the COVID-19 outbreak does not worsen significantly would be consistent with a year-end level of 3,400,” he wrote. The index hovered around 3,000 on Thursday.