Tough talk about tariffs troubled the global equity markets last week, with all 11 industrial sectors in the S&P 500 retreating from previous highs by Friday’s close. Although politics may have exacerbated anxiety about the state of international commerce, many market analysts have been concerned about the impact of the stronger U.S. dollar, slower global economic growth, and trade tensions on the finances of the companies in the S&P 500 for some time.
With 90% of those companies having reported their quarterly earnings results for Q1 2019 (January 1, 2019 to March 31, 2019), there are plenty of new data points to check against these concerns about global exposure. Data provider FactSet was able to group the most recent results into two categories to demonstrate the international influence: S&P 500 companies that generate more than 50% of their sales in the U.S. and S&P 500 companies that generate less than 50% of their sales in the U.S. The chart below shows how these two groups compare in the important metrics of year-over-year revenue and earnings growth. Companies with a more domestic focus demonstrated solid gains in revenue (7.3%) and earnings (6.20%) from Q1 2018 to Q1 2019, while companies with more foreign sales saw a paltry increase in revenue (0.20%) and a significant downturn in earnings (-12.80%). International customers in slowing economies may have less ability to buy additional goods, and when they do the strong dollar can make the offerings from the S&P 500 more expensive than alternatives. And the income earned from these foreign sales will decrease in value on corporate balance sheets as the local currencies that conducted the transactions depreciate versus the U.S. dollar. All of the above reasons can explain the dichotomy in the data. So even though the domestic labor market and latest GDP numbers remain strong, trade turmoil is just one of the ways that international exposure in the current economic environment can be a drag on a domestic, large-cap company’s financial outlook and, consequently, its share price.