Will Coronavirus Hurt Corporate Earnings?

The forced holiday that China has experienced due to the coronavirus has been compared to the entire US workforce taking a two month vacation! This means that China is producing less and that they are consuming less as well. Commodities suppliers will be hurt as they sell fewer raw materials to Chinese industry and foreign customers will not get the parts they need to do their own manufacturing. So, will the coronavirus hurt corporate earnings as it continues in China and spreads across the globe?

How Will the Coronavirus Affect the Stock Market?

CNN reports that Goldman Sachs is warning of a stock market correction. At the root of their concern is the combination of an overbought market and the threat to earnings posed by the Chinese coronavirus.

Stocks keep reaching record highs. Goldman Sachs is worried that leaves investors vulnerable to surprises.

The investment bank told clients this week that a near-term correction, in which the market slides at least 10% from a recent peak, “is looking much more probable.”

The thinking: Equity markets look “increasingly exposed” to disappointing earnings growth due to the new coronavirus outbreak, Goldman warns.

The number of companies that have lowered their guidance on profits for the first quarter is still in line with past years. But Apple’s surprise update this week that it wouldn’t hit its revenue target has put investors on edge.

The FANG stocks have been steadily climbing higher as they continually increase earnings. Investors are paying a premium for each of these stocks based on the expectation of continually higher value based on steady increases in earnings. When that turns out not to be the case, the correction could be impressive.

How Will the Coronavirus Hurt Corporate Earnings?

The concern about lower earnings is widespread. According to Forbes, more than 400 companies have projected lower earnings based on the effects of the virus.

Some 421 different companies, 394 of which are U.S.-based, have talked about the coronavirus on first quarter earnings calls.

These range from the likes of Starbucks, McDonald’s, Nike, and Apple to Yum Brands China which includes Pizza Hut, Taco Bell, and KFC. Luxury goods will be hurting as well according to Este Lauder, Capri Holdings, and LVMH.

The reasons include shutdowns in production due to the virus, reduced access to parts made in China, few raw materials purchased by China, and reduced purchases within China due to business shutdowns and reduced income.

Projections by Apple and others tell us that the effects of the virus on production, sales, and earning will spread far and wide before all of this is over.

What Should Investors Do about a Potential Market Correction?

This depends on whether you are a long term investor or make your money swing trading stocks. Those who are in the market for the short term may wish to pick stocks to short a few stocks. However, they will want to heed the lesson of Tesla and the Short Squeeze. Long term investors will do well to assess the intrinsic stock values within their holdings, only get rid of the weak ones now, and plan on investing in stocks with the highest intrinsic value when the market corrects.


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