Weak economic growth abroad has been consistently cited as a potential headwind for the U.S. stock market, given the large share of revenue that American multinational companies derive from abroad.
Indeed, S&P 500 (.SPX) firms consistently source more than 40% of their sales abroad.
But even as investors have been drilled with headlines on continued weakness in developed economies in Asia and Europe, a significant share of companies with a large, global footprint haven't said that these trends are hurting their foreign profits or management’s outlook.
Starbucks Corp. (SBUX), for instance, reported better-than-expected earnings on Thursday, while saying that sales in China grew by 3%. Dow (.DJI) component United Technologies Corp. (UTX) also beat analyst expectations, with strong revenue growth in its Otis division that grew sales in Asia by nearly 6%.
United Parcel Service Inc. (UPS) issued disappointing earnings, but the company’s weakness was derived from the U.S. market, as international profits hit new records. Other firms with significant revenues derived abroad, like Nasdaq-listed (COMP), Microsoft Inc. (MSFT), and Facebook Inc. (FB) showed no hints that foreign weakness is hampering their steady revenue growth.
“We haven’t seen a lot of evidence of global growth concerns crop up in corporate earnings,” JJ Kinahan, chief market strategist at TD Ameritrade told MarketWatch. “CEOs have set a positive overall tone,” when referring to the global economy, he added.
George Mateyo, chief investment officer at Key Private Bank, attributes this resilience to the fact that the global economy “is slowing but still growing.” While survey-based measures of economic activity, like the IHS Markit PMI composite index has been weakening, the indicator still shows the European economy expanding, he noted. Meanwhile, “China has been aggressive in stimulating its economy,” with a goal of maintaining at least 6% growth, which should continue to buttress other Asian economies as well as Europe, he said.
To be sure, a handful of companies has reported financial results that reflect weakness abroad. Caterpillar Inc. (CAT) shares fell 3.5% last week, after reporting Asia Pacific construction sales fell 4% in the first-quarter. Shares of the industrial, health and consumer products company 3M Co. (MMM) fell roughly 13% after it reported weaker-than-expected earnings and sales, due in part to “softness in China,” management said, during a Thursday conference call.
Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, suggested in an interview that industrial companies are faring worse in today’s global economy than consumer-facing ones, as economic weakness has been largely restricted to the manufacturing sectors of Europe and Asia. “In the U.S. and China, the consumers are still fine,” he said.
Procter & Gamble Co. (PG) management specifically cited the strong U.S. dollar as a “big driver of margin compression,” as overseas profits are repatriated, even as it reported “fairly strong results in Europe” and 11% organic sales growth in China, during a conference call Tuesday. United Technologies, meanwhile, noted that while sales abroad were strong, the company benefited less from this trend due to a stronger dollar.
The U.S. dollar has become unusually expensive relative to its peer currencies, hitting a 22 month high last week, according to the U.S. dollar index (.DXY). Consistently stronger growth in the U.S. than in other developed markets has made dollar-denominated assets more valuable, driving up the value of the greenback relative to other major currencies like the euro or Japanese yen.
U.S. based exporters like Procter & Gamble are negatively affected by a stronger dollar because it makes the cost of their goods more expensive in countries with weaker currencies, putting downward pressure on sales. Some analysts worry that further appreciation of the dollar could threaten U.S. stock valuations.
The Federal Reserve plays a major role in currency dynamics, as the central bank’s decisions to raise rates significantly starting in 2016 through the end of last year has also led to American assets like U.S. Treasury bills yielding higher returns than alternatives abroad.
Mark Stoekcle, CEO and senior portfolio manager of Adams Funds, told MarketWatch that the Federal Reserve has been a bigger force on the broader market than slowing growth abroad. The Fed’s decision earlier this year to cease its policy of steady interest rate increases “took a lot of uncertainty away” and has given “the market one less thing to worry about.”
Investors will get an update on Fed policy and thinking this week, when the central bank concludes a two-day policy meeting on Wednesday, May 1. Especially after inflation data released Friday showed price growth in the U.S. economy slowing amid brisk economic growth, “everyone feels good that the Fed isn’t going to raise rates anytime soon,” Adams said.
Aside from the Fed decision, the week ahead will bring a plethora of new economic data, including the release of the employment cost index, Case-Shiller home price index and a measure of consumer confidence on Tuesday.
Wednesday, investors will pay close attention to the ISM manufacturing index report, in addition to the Fed policy decision and subsequent press conference held by Federal Reserve Chairman Jerome Powell.
On Thursday, the government will issue estimates of weekly jobless claims, labor force productivity and factor orders for the month of March.
Friday will see the release of the much-anticipated nonfarm payrolls report, and investors will be looking to see if the U.S. economy can maintain its pace of strong job growth with healthy, but not inflationary, wage gains, which have been a key source of investor confidence given the dependence of the U.S. economy on consumer spending.
The coming week will also be another busy one for earnings announcements, with Google parent Alphabet Inc. (GOOG), set to release first-quarter results on Monday. Tuesday will feature earnings reports from Apple Inc. (AAPL), Mastercard Inc. (MA), Pfizer Inc. (PFE), and McDonald’s Corp. (MCD), while CVS Health Corp. (CVS) will announce earnings on Wednesday and DowDuPont Inc. (DWDP) on Thursday.
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