We’ve all heard or used this expression: “I have some good news, and some bad news…” Whenever directed at me, the words make me wince and brace for the worst. The phrase describes the corporate earnings picture right now.

First, the good news: Wall Street is cheered by fourth-quarter 2019 earnings that are beating estimates. The blended Q4 performance has swung from negative to positive.

Now the bad: Estimates for the first quarter of 2020 are deteriorating. The main culprits are slowing economic growth and the coronavirus epidemic.

The final earnings season of the decade has been full of drama. Impeachment, coronavirus, and other headline risks have whipsawed investors. However, despite initial expectations for negative earnings growth for Q4, so far results have been on the plus side.

Better-than-expected Q4 earnings are keeping the bull market alive. On Tuesday, the S&P 500 and tech-heavy NASDAQ composite eked out new record closing highs, although the Dow Jones Industrial Average closed flat. Trading was choppy, as investors weighed potential economic damage from the coronavirus.

In pre-market futures trading this morning, stocks were poised to open higher as optimism spread that perhaps the rate of coronavirus infection was slowing. Asian stocks have bounced back from their recent drubbing. That said, China on Wednesday reported 97 more deaths from the epidemic, pushing the total dead past 1,100. The number of cases worldwide is 45,000.

About 50% of S&P 500 companies have reported fourth-quarter 2019 earnings, with nearly 70% beating analyst expectations. Year-over-year earnings growth estimates for Q4 have shifted into the black (+1.6%) from a decline of 0.3% forecast on January 1, 2020.

Keep in mind, though, that earnings guidance is usually conservative, which means most S&P 500 companies usually end up beating analyst estimates every quarter. “The expectations game” should always be taken with a grain of salt, because earnings estimates are often manipulated.

Regardless, the ostensibly good news on the Q4 earnings front has been overshadowed by the coronavirus outbreak, which appears to be abating but remains a threat. The question now is, will the coronavirus hurt earnings in the first quarter of 2020? Even if the epidemic ended tomorrow, the damage already has been done.

S&P 500 firms in aggregate derive 60.5% of their revenue from the U.S. and 6.2% from China and Hong Kong. The semiconductors & semiconductor equipment industry group, at 29.9%, has the greatest exposure to China and Hong Kong. The utilities industry group, at 0.2%, has the least exposure (see chart).

The coronavirus makes the utilities sector even more appealing now as a safe haven play. U.S.-based utilities derive scant revenue from coronavirus-stricken Asia. However, coronavirus worries have pummeled crude oil, as well as crucial commodities such as copper, iron ore and soy.

Read This Story: Coronavirus Sickens Crude Oil and Copper

Accordingly, expectations for S&P 500 first-quarter 2020 earnings have dropped about 1% since the coronavirus starting to make news in the final days of January. Despite high equity valuations, analysts currently only see single-digit earnings growth for Q1.

Industry groups that have suffered the worst downward revisions to Q1 earnings projections are materials (-9.8%), capital goods (-9.7%), energy (-7.2%), and automobiles & components (-6.6%).

The pessimism in these industries for Q1 earnings stem from concerns that the coronavirus will dampen economic activity, reducing demand for oil and commodities. Most commodities depend on demand from China, where the epidemic originated.

At least for the short term, oil prices are likely to remain turbulent and caught in a downdraft. China is the world’s second-largest oil consumer and the country already has reduced its March orders from Saudi Arabia. The uncertainty in China is offsetting OPEC production cuts.

Because of the fracking revolution, the U.S. has surpassed Saudi Arabia to become the world’s largest crude oil producer. However, over the long haul, the net effect has left global markets sloshing with an excess of cheap crude, which in turn weighs on oil prices. Even before the coronavirus outbreak, energy was in the midst of a prolonged slump.

The coronavirus has disrupted global supply chains, another concern for investors. Further downward earnings revisions can be expected, especially as analysts start to weigh the adverse effects on companies such as Apple (NSDQ: AAPL), which generates considerable sales within infected areas.

The Q1 earnings of the casino, gaming, hotel, and aviation industries also are threatened by the epidemic, as travel in and out of China and Hong Kong is suspended.

Beijing is scrambling to get in front of the story. President Xi Jinping recently told officials to refrain from more restrictive measures to contain the outbreak, apparently out of concern for their potential economic damage.

World health experts have accused the authoritarian regime in China of covering up the extent of the illness. We could wake up to news stories telling us that the coronavirus is even worse than feared.

Gathering headwinds…

Another threat to Q1 earnings are emerging signs that the economic expansion is running out of steam. The Labor Department reported Tuesday that U.S. job openings fell for a second straight month in December to hit their lowest level in two years.

Job openings, a gauge of labor demand, declined by 364,000 to 6.4 million, the lowest reading since December 2017, the Labor Department said yesterday in its monthly Job Openings and Labor Turnover Survey (JOLTS).

According to the consensus of analysts, the final numbers for U.S. gross domestic product (GDP) will show 2.3% annual growth in 2019 followed by a tepid 1.8% in 2020. China’s GDP growth, already at a 30-year low, is expected to continue slowing, in large part because of the coronavirus.

Investors must contend with other headwinds. During testimony in the U.S. House on Tuesday, Federal Reserve Chair Jerome Powell urged Congress to tackle the massive federal deficit, ahead of a possible downturn in the economy.

Deficits would tie the hands of policymakers to address a recession. The Congressional Budget Office projects that the federal budget deficit will hit $1.015 trillion this year. Federal deficits are expected to average $1.3 trillion per year between 2021-2030.

Powell yesterday noted that the economic expansion remains in place, but warned that the coronavirus poses a risk to growth. If the epidemic isn’t contained, he suggested, all bets are off. You’d be wise to heed Powell’s words and stay cautious. The current good news/bad news investing climate could easily take a turn for the worse.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com