Business

Goldman Sachs warns of stock market correction

Posted February 20, 2020 7:22 a.m. EST

— A version of this story first appeared in CNN Business' Before the Bell newsletter. Not a subscriber? You can sign up right here.

Stocks keep reaching record highs. Goldman Sachs is worried that leaves investors vulnerable to surprises.

The investment bank told clients this week that a near-term correction, in which the market slides at least 10% from a recent peak, "is looking much more probable."

The thinking: Equity markets look "increasingly exposed" to disappointing earnings growth due to the new coronavirus outbreak, Goldman warns.

Remember: The number of companies that have lowered their guidance on profits for the first quarter is still in line with past years. But Apple's surprise update this week that it wouldn't hit its revenue target has put investors on edge.

Goldman Sachs notes that the global economy is expected to keep growing, and the United States is, too, despite the country already having experienced its longest economic expansion in 150 years. That creates a supportive environment for stocks. But the bank is concerned that earnings expectations could still be too rosy, especially given the exposure of global companies to the Chinese economy.

Apple, it observes, has been "an important driver" of better-than-expected earnings results. Big Tech companies — Facebook, Amazon, Apple, Microsoft and Google — beat earnings expectations by 20% on average last quarter, compared with 4% for the average S&P 500 company.

"Any weakness to these and other companies would likely push earnings estimates lower," wrote Peter Oppenheimer, the firm's chief global equity strategist.

Additionally, depressed bond yields have made stocks look more attractive by comparison. Oppenheimer points to Germany's DAX, which has also hit an all-time high as the yield on the country's benchmark 10-year bond remains in negative territory. That raises the stakes for corporate earnings as well, he argues.

Victoria's Secret is going private at $1.1 billion valuation

L Brands is closing in on a deal to sell control of Victoria's Secret to a private equity firm, the Wall Street Journal reports.

Sycamore Partners is expected to buy 55% of the brand and take the struggling business private. The deal, which could be announced as soon as Thursday, values Victoria's Secret at about $1.1 billion. L Brands, which would be reduced to running Bath & Body Works, is set to control 45% of the separate company.

Leadership shakeup: The Journal reports that Leslie Wexner, the billionaire who built L Brands into a retail behemoth, will step down as CEO and chairman, but is expected to remain on the board and keep stakes in both companies. Wexner has come under heavy scrutiny for his close ties to Jeffrey Epstein, who died in prison last summer while awaiting trial on sex trafficking charges.

Under pressure: Victoria's Secret has struggled with falling sales and competition from upstart lingerie brands. The company said in November that it was canceling its annual fashion show amid growing claims that it was out of touch. Last year, an activist investor built up a stake in the company and pushed for it to spin-off the more successful Bath & Body Works.

Shares of L Brands fell more than 10% in premarket trading. The valuation is a knock for a company that runs hundreds of Victoria's Secret and PINK brand stores globally, per its last annual report. They brought in more than $7 billion in sales in 2018.

Gold prices hit a nearly 7-year high

Stock records and the highest price for gold in nearly seven years? You read that correctly.

Even as market bulls drove the S&P 500 and Nasdaq to fresh records on Wednesday, gold prices passed $1,610 per ounce. The spike indicates that the spread of the novel coronavirus is encouraging investors to pile into safe haven assets, even as many decide to keep making riskier bets.

UBS analysts Wayne Gordon and Giovanni Staunovo think that gold could hit $1,650 per ounce or higher in the coming weeks. Their argument: First quarter data will "look ugly before it gets better."

"With US equity valuations elevated, any further upsets could see another bout of volatility, a further rally in government bonds and a higher gold price," they said in a recent note to clients.

Up next

Domino's Pizza and ViacomCBS report results before US markets open. Dropbox and Zscaler follow after the close.

Also today:

The US Energy Information Administration releases weekly crude oil inventories at 11 a.m. ET.The European Central Bank also releases minutes from its January meeting.

Coming tomorrow: US existing home sales for January.

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