Morning Notes — SPX Closes Coronavirus-Linked Pullback

Coronavirus: Optimism based on today’s report citing a Chinese university’s discovery of a drug to treat coronavirus seems late/misplaced. Since last week, there’ve been reports of scientists treating coronavirus patients with existing antiviral drugs. And any optimism on reports of a vaccine breakthrough could apply to the next coronavirus outbreak, but any completed, market-ready vaccine would be too late for this outbreak. While these reports offer nothing incremental, they add to yesterday’s sentiment-led reversal in China based on expectations for increased stimulus and maybe contribute to the narrative that markets have overshot. The key to markets will be the timing around China’s resumption in business and production. Expectations are for many businesses to restart this coming Monday with increasing numbers over the next two weeks. From an economic/investment perspective, it’s important the impact is temporary and largely felt in Q1. Our 2020 forecasts (from late December) had China growth as the second largest known risk to our bullish view. A 6% 2020 GDP growth figure is expected and markets will likely tolerate something closer to 5.5%, but even that would challenge the outlook.

Earnings growth: Consensus expectations into Q4 SPX earnings were too negative and have undergone a 2% upside revision. Revenue and net income growth have been better than feared, especially in Tech and Communication Services. We think Q4 is the inflection point and expect 2020 SPX estimates will need to be revised higher in the weeks/months ahead. These revisions and above-trend global manufacturing PMIs (we think it’s in the cards but maybe delayed to early Q2) would keep the pain trade skewed to the upside with a bias toward cyclically-sensitive markets (EWJ, VOO and VGK) and sectors (Industrials, Energy and Materials).