Here’s how low stocks could go in a coronavirus ‘growth scare’

The U.S. stock market’s tumble into correction territory this week indicates the global spread of the COVID-19 epidemic has triggered a full-fledged “growth scare,” according to analysts at RBC Capital Markets.

Stocks on Thursday entered correction territory — a drop of 10% from a recent high. The S&P 500 index












SPX, -2.88%










 dropped from a record close to a market correction in just six days, the fastest such drop on record, as investors feared global supply chain shocks could slow economic growth.

Major stock indexes remained under pressure Friday, with the Dow Jones Industrial Average












DJIA, -3.46%










 off more than 500 points, or 2%, and on track for a weekly fall of 12.7%.

See: The Dow’s weekly skid is shaping up to be its 5th worst in history

Analysts, led by Lori Calvasina, RBC’s head of U.S. equity strategy, argued in a Thursday note that a drop of 5% to 10% amounted to a “garden-variety pullback,” and that if that threshold didn’t hold, “the market will be telling us that a growth scare is under way.”

See: Stocks keep getting slammed because investors fear a ‘supply shock’ that central bankers can’t fix

An economic growth scare would raise the risk of a 14% to 20% decline, in line with pullbacks seen in 2010, 2011, 2015-16 and 2018, which could take the S&P 500 to the 2,700-2,900 range, the analysts wrote (see table below).

On the corporate earnings front, the analysts said their stress test sees the coronavirus outbreak knocking $4 off their official 2020 S&P 500 earnings-per-share forecast to $170, as well as offering $5 of downside risk from the current bottom-up consensus forecast of $175 a share. If $170 is “in the right neighborhood,” a valuation case would start to emerge for the S&P 500 to trade below 2,900, they said.

See: Don’t buy the stock dip yet, says Goldman as it warns coronavirus will wipe out earnings growth this year

And if the outlook moves beyond growth scare to looming recession — something the analysts emphasized they were not forecasting — the S&P 500 would be expected to retreat 24% to 32% from its peak.

Also read: Are stocks headed for a bear market? Here’s how far they would have to fall as coronavirus-fueled selloff continues

“We use a drop of 24% [to] 32% as our rule of thumb for a recessionary drawdown, since these numbers represent the median and average declines in the S&P 500 around recessions dating back to the 1930s,” they said.

A move on that order would take the index to the 2,300 to 2,600 range, the analysts said. While drawdowns for the S&P 500 were much larger following the collapse of the technology stocks bubble in the early 2000s and during the 2008-2009 financial crisis, any U.S. recession is likely to be quick and mild given the lack of the kinds of excesses in financial markets and the economy that prevailed during those earlier episodes, they said.