Will Coronavirus Panic Call for a Dismal Q1 Earnings Season?

The coronavirus continues to spread concern around the world with the Dow Jones Industrial Average falling 228 points this past Friday. The virus, which began in Wuhan China, has now infected nearly 77,000 people and has been tied to more than 2,400 deaths.

Cases of the virus has been found in at least 30 countries. South Korea was recently placed under “red alert” as the country alone faces more than 700 cases of the virus and six related deaths so far. World health officials are calling the outbreak of the virus in Iran “very worrisome.”

With the Q4 earnings season coming to an end, investors are now looking towards the Q1 earnings season and are worried that the impact of the virus will continue to spill into this season as well. Fourth-quarter profit growth for S&P 500 companies was at 3.1%, and if the energy sector is excluded, the growth rate was 6.0%, according to Refinitiv.

The expectations for earnings growth in the first quarter has been cut in half to just 3.2% from more than 6% at the start of 2020, according to Refinitiv.

“The virus is totally underrated,” CNBC’s Jim Cramer said last week. “What I think is a little too premature is they all presume that it is going to be solved within a foreseeable time frame. At what point do we say that many, many companies are going to be hurt by the virus [and] we’re paying too much for stocks.”

Earnings expectations have been cut by a slew of Wall Street analysts for the next quarter due to the virus. Companies also have been slashing their own guidance. According to Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, more U.S. companies issuing below-consensus guidance for the next quarter than those with upbeat forecasts.

“While guidance is typically weak in the first quarter as corporates set a low bar, it has been more cautious than usual this earnings season, likely due to the coronavirus,” Subramanian remarked.

According to FactSet, almost half of the S&P 500 companies have cited coronavirus during their earnings call this season. “Lost in those headlines is corporate America’s impressive performance this earnings season,” said John Lynch, LPL Financial’s chief investment strategist. “Companies have done an admirable job growing profits considering stiff headwinds.”