- It's looking increasingly likely that the market will correct in the near term, according to Peter Oppenheimer, the firm's chief global equity strategist.
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Goldman Sachs says investors' cavalier attitude towards coronavirus is setting the market up for a correction
Markets have shrugged off coronavirus fear on earnings optimism, and Goldman Sachs is warning against what they view as complacency.
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Goldman Sachs thinks investors could stand to be a little more on-edge about the coronavirus.
Optimism around corporate earnings has powered equities to new highs and prompted traders to set aside fears around coronavirus. But Goldman analyst Peter Oppenheimer thinks the market is overestimating the ability of companies to keep growing profits.
He adds that softening economic growth prospects are also being overlooked. That creates a situation where future earnings misses are more likely, which would weigh on share prices as well.
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"Over the past couple of months the new highs in the market have been driven by lower bond yields and looser financial conditions despite weaker growth prospects," Oppenheimer said. "This makes the market vulnerable to earnings disappointments."
He continued: "While a sustained bear market does not look likely, a near-term correction is looking much more probable."
But Oppenheimer says he understands where investors are coming from. He notes that market participants are likely being influenced by the market's resilience in the face of the 2003 SARS epidemic.
"Investors have largely taken the view that the impact will be temporary, hopefully short-lived, and that most of the weakness should be reversed with a strong rebound in the quarters that follow," he said.
Oppenheimer says that reaction or the lack thereof follows a "playbook" that investors have grown accustomed to from other market reactions to viral infections.
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But he points out that China is significantly more important to the global economy than it was when hit in 2003, he said. The matches research from Goldman last week suggesting that the economic cost of coronavirus could be castrophic in the near term .
"The impact of the coronavirus on earnings may well be underestimated in the current stock prices, suggesting that the risks of a correction are high," Oppenheimer said.
The post-coronavirus profit shakeout is already well underway. Three high-profile names added themselves to that list of companies affected on Thursday alone: Airline Air France-KLM, iPhone-maker Foxconn, and AP Moller-Maersk, the world's largest container shipping company.
Further, Apple the world's most valuable company warned Monday that the coronavirus hammered sales this quarter and will keep the company from hitting its second-quarter revenue target.
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See Also:
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