The coronavirus has called into question earnings forecasts for growth businesses, according to a recent article in Forbes that argues: “Do not expect a gentle adjustment to occur.”
The article notes that investors had “reached the point of placing high confidence in future projections,” and that current conditions will lead to a three-part reduction in the prices they will be willing to pay for growth stocks:
- Lower earnings forecasts: Analysts will remove any “underlying, optimistic assumptions.”
- Shorter focal point: “Gone will be the valuation metrics based on 2021 estimates,” with a great proportion of today’s valuation tied to “the now-murky first and second quarters of 2020, with a peek into the third quarter.”
- Renewed appreciation for value stocks: “Lessened will be the willingness to buy at high price the new, exciting, yet-to-be-proven, potentially high growth company stocks of tomorrow. “
While the article concurs that a bear market—as defined by a 20% or more decline in investment value—could “absolutely” occur, it notes that the more traditional definition of a market fraught with worry and pessimism might only occur if investors perceive a real risk of recession.
Despite frequent warnings that the stock market is overvalued, the article notes that we are not in a bubble: “To get into bubble territory requires a break from fundamentals and a move into basing ‘value’ on an exciting conceptual future vision, seemingly confirmed by a rapidly rising stock market that becomes viewed as ‘easy money.’ For this stock market, the most we can say is that investors were confident in the optimistic projections, but with stock prices still tied to fundamentals.”
“It looks like the coronavirus has infected the stock market beyond being a temporary uncertainty,” the article concludes, noting the large selloff in February “likely dented investor enthusiasm and heightened concern. As a result, growth stocks, the favored investments over the past year, are now at risk. In addition, if the negativity continues, it will foster more negativity, and there are real issues that have been ignored and need to be considered.”
The article suggests that it might be a good time to hold onto cash and “await a potential downturn that produces attractive buying opportunities.”
