- The S&P 500 could fall another roughly 6% to 2,600 as traders price in a potential recession amid the coronavirus outbreak, analysts at Morgan Stanley wrote in a Monday note.
- The firm maintained its bull, base, and bear case targets for the S&P 500 of 3,250, 3,000, and 2,750, respectively. Still, they expect markets to price in a recession in the next two to three months.
- Given that the US economy was already experiencing headwinds, the coronavirus doesn’t have to be a “full-blown pandemic” to tip the US into a recession, according to the note.
- Watch the S&P 500 trade live on Markets Insider.
- Read more on Business Insider.
Stocks fell sharply enough to trigger a trading halt on Monday as panic over the coronavirus outbreak continues. The market could fall even further, according to Morgan Stanley.
The firm on Monday lowered its near-term downside risk for the S&P 500 index to 2,600, about 6% lower than where the market was when trading was halted. It’s looking increasingly likely that a recession will be fully priced into the market in the next two to three months regardless of if the US actually experiences one, analysts led by economist Michael Wilson wrote in the note.
“Risks are now greater from consumer responses to the virus and lower oil impacting solvency, business investment, energy employment, and financial conditions via credit markets,” Wilson said.
The firm maintained its bull, base, and bear targets of 3,250, 3,000, and 2,750 for the S&P 500 through the year-end. Still, the impact of the coronavirus outbreak is looming large and putting downward pressure on an already fragile US economy, according to the note. That makes a “downside overshoot” much more likely in the near term.
Specifically, the virus is the fourth economic shock that the US has experienced in the last two years, Wilson said. The US has also grappled with an ongoing earnings recession caused by fiscal stimulus, the Fed’s aggressive monetary tightening in 2017-2018, and tariffs from the ongoing trade dispute between the US and China.
That means that the coronavirus is not the only growth concern, according to Morgan Stanley. This is important because it suggests that the virus doesn’t have to be a “full-blown pandemic” to tip the US into a recession, according to the note.
“While we obviously did not anticipate the outbreak of the coronavirus, we do think its risk to the economy is greater than perceived given a still fragile state from the headwinds noted,” Wilson said.
The firm’s bear case has always been a mild recession, but the virus could make the fall in earnings steeper than anticipated as companies are forced to take more aggressive actions, according to the note. In addition, OPEC’s failure to agree on cuts and falling oil prices led to a significantly lower outlook for crude, and could create a situation that exacerbates already elevated recession risks and further drags on earnings, Wilson wrote.