Markets Struggle to Quantify the Impacts of COVID-19

In the U.S., it was just the beginning of March when coronavirus fears began to take hold. Stay-at-home directives were issued in numerous states and the S&P 500 made its fastest ever drop into a bear market.

Analysts surveyed by FactSet have dramatically lowered their estimates of U.S. economic growth. The median consensus estimate at the time of writing is for a 2.9% contraction in GDP in 2020. Q1 is projected to see a contraction of 4.0% (annualized q/q%), while Q2 is projected to bear the brunt of the downturn; the median consensus forecast stands at -26.5%. Current estimates predict a return to growth in the second half of 2020.

As we enter earnings season, the outlook is changing rapidly. In terms of earnings expectations for the S&P 500, analysts are now calling for year-over-year declines in earnings of -15.0%, -30.9%, -16.2%, and -6.9% for the four quarters of 2020, respectively, based on FactSet’s calculations. For CY2020, analysts project a 14.6% decline in earnings.

The emerging consensus relies on various assumptions, including:

• A successful flattening of the curve in April/May;
• The end to social distancing measures by June;
• A rebound in manufacturing and economic output on a similar trajectory to the one seen in China.

The reality, however, is that the outlook remains volatile due to underlying uncertainty as to how coronavirus will ultimately impact the U.S. market. Risk factors remain. For example:

• We do not know when the contagion curve will flatten.
• The possible beginning of a second wave of contagion is currently hitting Asian markets, some of which are restarting lockdown measures.
• Unemployment is rising starkly and the longer the lockdown continues, the harder it could be to return the economy to full strength.
• Even if the U.S. can rebound quickly, commercial partners may remain quarantined, hitting supply and demand.
• Market liquidity is still a concern despite recent Fed action. Another potential crisis, for example in corporate credit, could hit confidence further.
• Continued volatility in oil prices could hit the struggling energy sector and reverberate through markets; some energy companies are already going bankrupt.

The bottom line is nobody knows at this point what will happen. The consensus outlined above may prove correct, but other scenarios remain distinctly possible, including corporate and/or country-level credit defaults that would exacerbate the crisis in both real and financial markets. Alternatively, a vaccine could be found faster than expected, which health experts currently estimate to be 12-18 months away.

Indeed, one indication that we may see continued downward momentum for the rest of the year—if not into 2021—comes from S&P 500 quarterly dividend futures, which have fallen sharply on increasing pessimism about companies’ ability to pay dividends over the next three quarters. Markets, at least, see rough times for U.S. corporations through the end of 2020.