Sales abroad push 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, according to earnings-tracker Thomson Reuters.
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 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 in rebounding economies that is snapping up tech gadgets, chips and computer hardware from U.S. companies headquartered in places such as Silicon Valley, and heavy machinery made by American firms based in places such as Peoria, Ill., that is propelling profit growth.
“There is a lot of global success showing up in these 500 American companies,” says Patrick Palfrey, an equity strategist at RBC.
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 due largely to the fact that it is made up of 500 large-company stocks that represent all of the USA’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: u 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 America leads in — such as technology, energy and heavy equip- ment 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. The Bank of Japan recently upped its 2017 growth outlook for fiscal 2017 to 1.5% from 1.3%. And growth in China is stabilizing just below 7% after fears of a more dramatic slowdown. The bottom line is U.S. multinationals are in the profit sweet spot.
Economic activity in Europe has been bolstered by the stimulus policies of the European Central Bank. Historically low rates have pushed borrowing costs sharply lower, which has spurred investment, lending and spending. Many Asian economies have gotten a boost from the sharp rebound in oil and other commodities, creating much-needed capital to buy U.S. products as business conditions improve.
Better business conditions abroad are reflected in both earnings and stock performance. 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 vast majority of data suggests the U.S. economy is doing quite fine.” Dan Miller, director of equities at GW&K Investment Management
the 10.6% generated by more 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.
“The S&P 500 is more sensitive to global GDP than domestic GDP,” says Jill Carey Hall, equity strategist at Bank of America Merrill Lynch.
u 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 this year 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 so-called developing markets, better than the 2.3% growth forecast for the U.S.
More important, Wilson says, is the fact that the world econo- my is getting contributions from virtually every corner of the globe — Europe, Japan, China and emerging markets. He dubs it a “synchronized recovery.”
“It is really the first time in a long time,” says Wilson, “that we have seen all these economic engines moving in the right direction at the same time.”
And big U.S. companies are benefiting most from the broad global expansion after years of weakness caused by the crash in commodity prices.
Consider Caterpillar, the maker of iconic yellow 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.
After topping profit expectations by a wide margin, CAT’s chief financial officer, Brad Halverson, noting signs of emerging strength abroad, said, “It’s a start of a recovery.”
Domestic-focused companies — such as sellers of toilet paper, groceries, electricity and other utilities — generally have sales and revenue streams that are more constant over time, no matter how the global economy is doing, analysts say.
By contrast, so-called “cyclical” companies that benefit from economic upswings — and which sell things such as industrial equipment, PCs, computer chips, and earth-moving equipment such as backhoes — tend to sell more goods abroad and make more money when business conditions overseas are stronger. u Two big obstacles fall. Oil prices have nearly doubled off their 2016 bottom and are back near $50 a barrel. That rebound has helped energy companies in