REVIVED SALES ABROAD HELP PUSH UP U. S. PROFITS
Thanks to Europe and Asia, large- company earnings are growing at best pace since 2011
There’s a foreign twist to the positive U. S. earnings story.
Profits for companies in the Standard & Poor’s 500 — a crucial U. S. stock index — are growing at a nearly 14% clip in the first three months of the year, the most robust quarterly pace since late 2011, earnings tracker Thomson Reuters says.
Stronger foreign demand for goods made by U. S. companies is a key reason why large American firms that do a lot of business abroad are thriving — and why the S& P 500 is within 0.3% of its March 1 record high.
While President Trump touts an “America first” policy, it is the overseas buyer that is snapping up tech gadgets, chips and computer hardware from U. S. companies headquartered in such places as Silicon Valley, and heavy machinery made by American firms based in places such as Peoria, Ill., that is propelling profit growth.
The S& P 500 is one of the most closely watched stock gauges in the world and is viewed as a barometer of the U. S. stock market’s health largely because it is made up of 500 large- company stocks that repre-
sent all of the U. S.’ s key business sectors.
Investors wondering how profits can be up so much when the U. S. economy has faltered — GDP growth slowed to a three- year low of 0.7% in the first quarter— should consider these trends:
Global reach pays off. Big U. S. companies are less dependent on America’s economy than investors might think. Nearly half ( 44.4%) of sales of S& P 500 companies come from overseas, according to S& P Dow Jones Indices. And many industries that America leads in, such as technology, energy and heavy equipment makers in the industrial sector, get roughly half or more of their total sales beyond U. S. borders.
That’s crucial now that the economy is improving in Europe, where April manufacturing data reached its highest level in six years.
Companies in the S& P 500 that get more than half of their revenue from abroad are estimated to grow profits more than 21% in this year’s first quarter, double the 10.6% generated by domestic-focused companies that get more than half of their revenue in America, according to Thomson Reuters Eikon.
The 50 stocks in the S& P 500 with the most international revenues are up nearly 13% this year, vs. a gain of less than 1% for the 50 stocks in the large company stock index with the least amount of foreign revenues, according to Bespoke Investment Group. Foreign economies pick up the slack. After years of the U. S. accounting for most of the world’s growth, other parts of the globe are now pitching in, says Mike Wilson, chief U. S. equity strategist at Morgan Stanley.
“We will do close to 4% global GDP growth for the first time in a few years,” he says. “That’s a big number.”
And the International Monetary Fund now sees 4.5% growth in 2017 for socalled developing markets, better than the 2.3% growth forecast for the U. S.
More important, Wilson says, is the fact that the world economy is getting contributions from virtually every corner of the globe — Europe, Japan, China and emerging markets. He dubs it a “synchronized recovery.”
Big U. S. companies are benefiting most from broad global expansion after years of weakness caused by the crash in commodity prices. Consider Caterpillar, maker of trucks that move earth and machines used for mining. CAT gets nearly 60% of its sales from abroad, which helped it post its first quarterly sales increase in the January- March period
since 2015.
Two big obstacles fall. Oil prices have almost doubled from their 2016 bottom, to near $ 50 a barrel. The rebound has helped energy firms in the U. S. enjoy an earnings surge of nearly 650% in the first three months of the year. Another boost to earnings has been the U. S. dollar declining more than 3.5% in value this year vs. a basket of foreign currencies. A cheaper dollar makes U. S. products less expensive overseas, which boosts sales and earnings. Don’t count out the U. S. The foreign profit boost doesn’t mean the U. S. economy isn’t helping, says Dan Miller, director of equities at GW& K Investment Management.
“There’s been positive data on jobs, housing, manufacturing and consumer confidence,” he says. “The vast majority of data suggests the U. S. economy is doing quite fine.”