Third-quarter earnings season is running well and helped the market reverse its October swoon, but investors are still worried about global growth. Between China and Europe, it’s still pretty lousy.
Happily, the health of the global economy is less important to U.S. corporate results than most investors realize. True, roughly a third of S&P 500 revenue is generated overseas, but that contribution to the well-being of U.S. multinationals is generally overstated.
Indeed, as much as the market is wringing its hands over the slowdown in China and Europe flirting once again with recession, weak demand from those regions isn’t great enough to scuttle U.S. corporate earnings and sales.
Europe is a mess once again, in no small part because of the conflict between Russia and Ukraine. Even mighty Germany — the stalwart of the eurozone economy — is feeling the pain. As a result, European bourses have been losers this year. The U.K.’s FTSE 100 is off nearly 4%, while the French CAC 40 has lost nearly 5%. Even the German DAX is hurting, losing 4% for the year-to-date.
Europe, China Can’t Clobber Earnings
But there’s no reason for weakness in Europe to clobber U.S. performance. The importantance of the Continent to U.S. corporate results is just too small. As Burt White, chief investment officer for LPL Financial, tells clients:
“S&P 500 companies generate only about 15% of their revenue from Europe (excluding the United Kingdom). Therefore, a drop in demand in Europe must be seven times as large as one in the United States to have equal impact. From an economic perspective, Europe is an even smaller piece. The Eurozone is the destination for about that same percentage (15%) of our exports.”
To be sure, Europe is important to U.S. results, but it’s no killer.
The same goes for China. LPL Financial estimates that only 5% of S&P 500 revenue comes from the Middle Kingdom. Just as important, with the exception of fast-food giants like Yum Brands (YUM) and McDonald’s (MCD), U.S. companies aren’t blaming China for earnings shortfalls or cuts to outlooks. Here’s Burt White again:
“We heard generally positive comments from companies with large operations [in China]. For example, Honeywell (HON) (industrials) and Alcoa (AA) (materials) noted that China was a strong market for them. We did find companies more cautious on China, including Caterpillar (CAT) and Microsoft (MSFT), but they were few and far between.”
The bottom line is that apart from a surging dollar, the impact to third-quarter earnings from a slower global economy has been relatively small, and that should continue to be the case for the fourth quarter an beyond.
The U.S. has by no means decoupled from Europe and China remains a key and growing market. But the most important factor driving U.S. results is domestic demand, and that’s gradually picking up as the economic recovery makes incremental gains.
The S&P 500 is though of as a collection of multinationals, but it’s really a better reflector of conditions here at home.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
