In our 2020 Market Outlook, we looked at a bifurcated economy asked “What may tip the scale?” We got our answer in the first quarter: the novel coronavirus.

As COVID-19 spread around the world in the early months of 2020, governments enacted quarantines, travel bans, school closings and other measures. Global supply chains were disrupted. Reduced demand is weighing on many industries, starting with travel, hospitality and leisure. Oil prices dropped after Saudi Arabia boosted production, in effect launching a price war with Russia. U.S. Treasury yields fell to record lows.

Amid the uncertainty, analysts have cut earnings estimates—especially for the first quarter—while many companies have withdrawn earnings guidance altogether. With the “E” (earnings) and the “P” (price) in the price-to-earnings (P/E) ratio both dropping, assessing stocks’ valuations on forward-looking earnings has become nearly impossible.

Estimated earnings growth has been cut


Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 03/16/2020.

So what do we expect going forward? It’s especially difficult to make forecasts during a global shock like the coronavirus, but here’s what we know now:

Global recession risk has risen

Although it’s likely we are entering a global recession, it’s too early to predict the magnitude. In response to the threat posed by COVID-19, the Organization for Economic Cooperation and Development (OECD) lowered its global gross domestic product (GDP) growth forecast recently by a half percentage point, to 2.4% for 2020. Generally speaking, global growth below 2.5% is recessionary.

However, global growth may bounce back quickly after the coronavirus recedes. Economic data was encouraging prior to the outbreak, with signs of a recovery in global manufacturing activity and continued strong U.S. jobs data—both of which are at risk again. Any rebound could be helped by a flood of fiscal and monetary stimulus—central banks in the U.S., China, Australia, and Mexico have already cut interest rates, while government fiscal stimulus has been added in Italy, Japan, South Korea, and the United States. More is likely on the way.