We adapt quickly when forced to, but then we get stuck in a mental loop and it takes a while to break free. By we I mean you and me – investors and the people who follow the markets. We learn the new story when the gun is pointed at our heads and then it’s tough to unlearn it. It’s ingrained in our heads and it becomes the terra firma upon which we build so much of the rest of the narrative.
The latest story we’ve convinced ourselves of is that US stocks are the best house in a bad neighborhood and that one of the biggest headwinds the US markets face is the uncertainty and slowdown from “overseas”.
Whatever the fuck that means – because we can’t even pay our bills without a reprise of the goddamn Civil War. If this is the best house, I don’t know what to tell you.
Anyway, here’s something worth thinking about – the “global slowdown” concept has become so structural in the minds of the investor class that almost no one even considers the fact that international growth could, at some point, become a tailwind rather than a headwind- a boost for the S&P 500. It’s worth noting that about half of all revenues and profits for our large cap companies are coming from overseas.
Jeff Kleintop, chief strategist for LPL Financial, has a new piece of research out in which he highlights six themes for the earnings season that’s just gotten underway. One of them is the idea that international markets may now start popping up in the plus column during this quarter’s reports…
Stronger overseas demand – Sluggish global growth is contributing to slow sales. About 40% of S&P 500 corporate profits are derived from global sources. It is not only the United States that had a PMI that was above 50 and rising in the third quarter — so did Europe, China, and Japan for the first time since early 2009/late 2010. After Europe acted as a drag on overseas sales for the prior six quarters of recession, the economic improvement seen in the third quarter in Europe may result in better international revenue. From industrial production in Germany to machinery orders in Japan and vehicles sales in China, demand is firming around the world. An offset again this quarter is the value of the dollar relative to the Japanese yen, which rose roughly 20% over the past year, acting as a drag on foreign-derived profits when translated back into dollars and reported. This may have had some effect on reported results from companies in the health care, industrial, and technology sectors — where S&P 500 companies’ sales to Japan are concentrated.
Josh here – European and Japanese stocks have already taken flight this year because the data is confirming true recovery. Chinese data seems to have stabilized at a 7% growth rate and, barring any sudden taper, the rest of the EM markets may be ready to get their shit together.
This would be a welcome development for US company shareholders, it could even put an end to the revenue growth deficits that have become all the more glaring in the era of record profitability.