Goldman Sachs warns coronavirus is biggest risk for stock markets

The coronavirus is the biggest near-term risk to stock markets and a correction is looking much more likely, Goldman Sachs has warned.

Equity markets have continued to rise during the spread of coronavirus even though economists have cut their expectations for first-quarter GDP growth, Goldman's chief global equity strategist Peter Oppenheimer said in a note to clients. Investors have taken the view that the impact will be short-lived and that much of the weakness will be recovered.

Support for equities appears to be in place with economists expecting the global economy to expand despite the US already having had the longest period of growth in 150 years. Household and corporate balance sheets are in a better state but there are two medium-term headwinds, Oppenheimer said.

Lower bond yields and inflation expectations should play out in lower growth prospects that will affect equities and increasing profit margins offsetting weaker top-line growth are also reaching their peaks, he said.

But in the near term the biggest risk is the coronavirus and its potential effect on company profits a problem that is underestimated by the market, Oppenheimer said. Comparisons with the SARS outbreak in 2003 may not be relevant because China's economy is six times bigger now and China is more interconnected with the rest of the world.

"Chinese tourism alone now accounts for 0.4% of global GDP, and the number of 'missing work days' in China will be roughly equivalent to the entire US workforce taking an unplanned break for two months," Oppenheimer wrote. "We believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high."

Oppenheimer said an increasing number of companies were starting to warn about virus's direct or indirect impact. Apple, the world's biggest company was a recent high-profile example. Weakness for Apple and other big US technology companies would push earnings estimates lower, he said.

Ranking coronavirus as the biggest risk to stock markets puts Oppenheimer at odds with fund managers who rate the disease as the third-largest risk after the US presidential election and the end of the bond bubble, according to a Bank of America survey of investors. Coronavirus replaced trade wars as the third-biggest risk in the survey.