- Earnings estimates have been plummeting in Europe, which has been hard-hit by coronavirus.
- Should the virus spread in the U.S. as it is spreading in Italy, U.S. earnings could see similar declines.
- How severe the outbreak and how long it lasts in the U.S. are unpredictable.
First quarter U.S. earnings estimates have been declining since coronavirus concerns became known toward the end of January, but Europe — now the cutting edge of the COVID-19 epidemic — have been plummeting.
The concern is that should the virus spread in the U.S. as it is spreading in Italy, U.S. earnings could see similar declines.
"So far, few U.S. companies have reported any significant change in capex or employment in the U.S., but it appears EU earnings will be quite weak," Evercore ISI said in a recent report.
Earnings estimates for the STOXX 600, essentially the S&P 500 for European equities, have been dropping fast since news of the coronavirus outbreak hit the continent in late January.
First quarter earnings estimates for the STOXX 600
Jan. 21: Up 6.7%
Today: own 1.4%
The impact is more pronounced by industry. Industrials, expected to see earnings gains of 5% at the end of January, are now expected to be down 17%. Even consumer staples, expected to be up 17% at the end of January, are now expected to be down 7%.
Given that only Italy has been experiencing significant real disruption, is this what we can expect from U.S. earnings in the next several weeks?
"There is no doubt there will be a hit to growth, but I don't believe we will be seeing economic Armageddon," Nick Raich, who tracks corporate earnings at Earnings Scout, told me. "We may see some shutdowns, but once we get the virus contained, growth will return."
The question, of course, is not just how severe the outbreak in the U.S. will be, but its duration.
So far, most analyses of the economic impact are based on events like SARS and MERS, all of which had an impact of only two quarters. Raich and others are assuming the same will happen with coronavirus: "So long as the duration of the virus does not go into the second half of the year, we should be OK."
But the coronavirus impact may be much more severe that other outbreaks.
In the red zone in Italy's north, where several towns have been quarantined, schools and restaurants have closed. Farmers are reporting have trouble finding people to plant crops. Italy's tourism federation said up to 90% of hotel and travel agency bookings had been canceled in Rome for March.
Many events in the U.S. are already seeing diminished attendance. South by Southwest, the annual film and music conference in Austin, Texas, is scheduled to open March 13, but many of the key participants, including Twitter, Facebook, Intel and Mashable, have pulled out.