According to various estimates, including an annual survey by Standard & Poor's, well over 30% of sales of the S&P 500 and roughly 50% of earnings come from foreign sources. Of this amount, roughly 22% of sales come from Europe and roughly 25% of profits. On a separate note, it may also be of interest to note that well over 50% of all taxes paid by U.S. corporations (not just S&P 500) are paid to foreign governments.
It is widely acknowledged that the above estimates of foreign sales and profits are significantly understated given that only around 65% of companies in the S&P 500 provide a geographic breakdown of sales and earnings.
By far, the S&P 500 sector that is most exposed to Europe is the technology sector. Almost 60% of S&P Information Technology sector sales comes from foreign sources.
From various sources that I have consulted, it can be reasonably estimated that over 35% of sales and over 40% profits of the S&P 500 technology sector come from Europe. I also estimate that well over 50% of earnings growth in the past year was derived from Europe.
It should be noted that technology sector earnings derived from Europe proved quite resilient in the face macroeconomic and financial stability in 2010.
However, the situation in 2011 could well be different. This time it looks like the economic slowdown in Europe is likely to be more pronounced than in 2010. According to the most recent data, the vast majority of EU member economies are either contracting or on the verge of doing so.
Furthermore, the magnitude of systemic risks faced by companies doing business in Europe today is vastly higher than in 2010.
In 2010 the primary focus was on the problems in Greece and the potential for contagion to the rest of the region. The prospect of contagion to major countries such as Spain and Italy was a mere possibility that was speculated about. Today, the prospect of problems in Italy and Spain are not mere speculation. It is a clear and present danger.
Indeed, for reasons that I explain here, it is increasingly likely that the situation in Europe will involve a messy Greek default. With the sort of default risk being priced into Spanish and Italian sovereign debt, this scenario risks a complete unwinding of the euro.
If the likelihood of such a scenario increases substantially in the next few days and weeks, the technology stocks mentioned above, as well as many others with major exposure to Europe, could be subject to very swift corrections of 25% or more.
Thus, investors in stocks such as Apple, (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), Intel (NASDAQ:INTC), Oracle (NYSE:ORCL), Cisco (NASDAQ:CSCO), Texas Instruments (NYSE:TI) and Qualcomm (NASDAQ:QCOM) should be extremely cautious. These stocks, on average, derive more than 40% of their revenues from Europe. Given the weight of these companies in the ^IXIC, ^NDX and QQQ, the entire technology sector could be pulled down with them. This also implies systemic risks for the stock market as a whole given the weight of these companies in the S&P 500 (^SPX), SPY, Dow (^DJIA) and DIA.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long SPX puts.