March 3, 2020

Coronavirus Effect Marks Historic Week for U.S. Equities

by Tajinder Dhillon and David Aurelio.

Concern about the spread of the novel coronavirus caused global equities to fall at historic levels last week. On Feb. 27, the S&P 500 declined 137.63 points, marking the largest daily point decline over the last 55 years.

Looking at performance over the last week, the S&P 500 declined 11.5%, which ranks as the third largest weekly decline over the last 20 years. This wiped $3.2 trillion from the value of companies in the index. The last time the index suffered a larger weekly decline was during the 2008 financial crisis, when the index declined 18.2%.

Only two constituents in the S&P 500 posted a positive gain last week, which included Regeneron Pharmaceuticals (REGN.O) and Qorvo (QRVO.O) who saw share price increases of 10.3% and 2.4% respectively. Airlines and cruise operators were the hardest hit industries. American Airlines Group (AAL.O) shares saw the largest decline of any constituent in the S&P 500, dropping 31.5%.  Other airlines including Alaska Air Group (ALK.N), United Airlines Holdings (UAL.O), and Delta Air Lines (DAL.O) saw declines of 22.9%, 21.0%, and 20.3% respectively. Cruise operators including Royal Caribbean Cruises (RCL.N), Norwegian Cruise Line Holdings (NCLH.N), and Carnival (CCL) also saw declines of 24.2%, 20.7%, and 19.8% respectively.

Looking at Exhibit 1, the forward P/E ratio for the S&P 500 declined to 16.7x, from a peak value of 19.1x in February.  The 10-year average stands at 15.2x, which results in a 9.9% premium.

Exhibit 1: Forward P/E Ratio for S&P 500

Volatility levels also spiked as indicated by the CBOE Market Volatility Index (VIX). The VIX increased 134.8% last week to a level of 40.11, not last seen since August 2015. A flight to safety led the US 10-year bond yield to reach an all-time low of 1.06%, which could put further pressure on the U.S. Federal Reserve to lower interest rates, as seen in Exhibit 2.

Exhibit 2: Bond Yield vs. Fed Funds Rate

Impact on Q1 earnings season

As the coronavirus spreads to new areas, analysts have been cutting their Q1 2020 estimates as shown in Exhibit 3. As a result, the S&P 500’s Q1 earnings estimates have fallen 2.7% since Jan. 31, bringing the expected Y/Y growth rate to 2.7% from 5.4% on Jan. 31. This 2.7 percentage point decline in the first quarter growth estimate exceeds the typical 2.3 percentage point decline seen between the start of the quarter and the start of earnings season, and there is still one month left before the Q1 earnings season begins.

Steep declines in commodity prices following the coronavirus outbreak are expected to affect the energy and materials sectors, which have seen their Q1 earnings estimates come down 14.3% and 11.7% since Jan. 31. Travel and supply chain disruptions are expected to have notable impacts on Q1 earnings for the consumer discretionary and industrials sectors, as a result, since Jan. 31, analysts have reduced their first quarter estimates for the two by 9.6% and 7.1%, respectively.

Exhibit 3: Earnings Estimate Revisions for S&P 500

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