Stock strategists continue to worry about the spread of America's economic slowdown to the rest of the world. Revenue from international operations, whether in emerging markets in Asia or stalwarts like Europe, has been one pillar still supporting U.S. stocks as the domestic economy slows.
Now, Standard and Poor's international equity strategist Alec Young says sales to those markets might be slowing. That could be worse than expected for U.S. equities. He writes:
In light of numerous domestic economic headwinds, including ongoing weakness in the housing and job markets, historically elevated commodity prices and tighter lending standards, foreign revenue momentum has been a helpful offset for S&P 500 companies over the past 12 months, in our view. While year-over-year S&P 500 EPS have been declining since the 2007 third quarter, we believe the results would have been worse without positive overseas sales trends.
The fallout could be worse because in recent years, S&P 500 firms have become notably more exposed to foreign sales as a percent of their total sales. Of those that break out domestic and international sales, 45.8 percent of their 2007 revenues were produced abroad, up from 43.6 percent in 2006, Young says. Back in 2001, foreign sales were in the 30 to 35 percent range.
That makes S&P's outlook for the rest of the year even bleaker as the global slowdown hits foreign sales, especially in developed countries facing the same troubles afflicting the United States. Here's Young's near-term outlook:
Unfortunately, as the second half of 2008 progresses, we believe recent foreign sales drivers are beginning to fade, increasing the likelihood that S&P 500 foreign sales growth may moderate somewhat over the coming months. First, the growth slowdown in developed foreign economies like Canada, the U.K., Europe, Japan and Australia is accelerating, by our analysis, as tighter credit, weakening housing markets, elevated commodity prices and slowing exports combine to cool economic activity. This does not bode well for S&P 500 sales growth, by our analysis, as a significant share of foreign sales originate in developed foreign markets, despite the higher growth rates of emerging market sales.
Lastly, the rebound in the dollar, while a positive in terms of U.S. spending power and lowering oil prices, could also crimp foreign sales:
Unless the dollar quickly resumes its decline, we believe U.S. multinationals will enjoy a much smaller positive currency translation in the 2008 fourth quarter than in the first half of the year. This should erode the value of S&P 500 companies' foreign sales, as they will likely be converted into fewer U.S. dollars when the funds are repatriated.
What all this means is that foreign demand is fading at a time when U.S. equities have fallen significantly (we're still in bear market territory, after all). With earnings estimates still widely believed to be on the high side for a large sector of the market, further weakness abroad argues against a quick rebound in stocks by the end of the year.