The S&P 500 is a little different from the other major stock indices around the world. For example, fully 75% of the revenues of companies in the FTSE100 come from outside the UK. This explains the inverse relationship of the index to the sterling exchange rate. A falling pound leads to foreign profits being worth more in the usual reporting currency, thus - ceteris paribus - pushing the FTSE100 up. The other European indices are similar, in that the majority of sales are outside the host country of the stock exchange. In this respect the S&P 500 is an outlier with only some 43% of sales coming from outside the US. And a further portion are denominated in dollars as well.
S&P Dow Jones Indices ("S&P DJI") today announced that, for the first time in three years, S&P 500® companies with full reporting information for 2017 posted an increase in sales from outside the United States.
According to S&P DJI's annual S&P 500 Foreign Sales Report, foreign sales totaled 43.6% for 2017, up from 43.2% for 2016. The total for 2017 still trails 44.3% for 2015 and 47.8% for 2014, which is the record since S&P DJI's first foreign sales report from 2003.
We could just think of this as mildly interesting and then move on. After all, an exchange index based in a very large economy - $19 trillion or so for the US - is likely to have more domestic sales than one in smaller - maybe $2.5 to $2.8 trillion for the UK depending upon exchange rates.
However, as Moody's Analytics points out we should think a little more on this. Because those different economies do grow at different rates. And the economic growth rate in a company's main market is one of the major determinants of earnings and thus stock prices. Yes, of course, not the only one, technological change, passing fashion even, can and will make a difference. But general economic conditions are obviously important.
Given that we do have those different growth rates that means that companies - on the same exchange, in the same index - with differing levels of foreign to domestic sales can and will do differently. As they do do differently:
First-quarter 2019 showed there was no place like home for U.S. corporations. Apparently, U.S. business activity was outperforming the rest of the world by a wide margin well before the trade dispute between the U.S. and China intensified.
Well, yes, we do know that. The US has considerably more economic growth than the eurozone for example. The latter had hardly any so that wasn't difficult.
For those S&P 500 member companies showing less than 50% of sales inside the U.S., first-quarter 2019's revenues per share rose by an imperceptible 0.2% annually, while earnings per share plunged by 12.8% annually. By contrast, for S&P 500 member companies showing more than 50% of sales inside the U.S., first-quarter 2019's revenues per share advanced by 7.3% annually, while earnings per share increased by 6.2% annually.
In summary, for S&P 500 member companies with mostly U.S. sales, first-quarter 2019's revenues per share outperformed companies whose sales were mostly from abroad by 7.1 percentage points, while the earnings per share of the U.S.-centric members outperformed the rest by 19 percentage points.
That's not just an exchange rate effect. If it were we could explain the fall in growth among foreign focused companies but not the growth in domestic ones. Well, in theory we could still do that, import substitution perhaps. But we've not seen enough change in the trade deficit for that to be a plausible explanation.
So, it is differential growth in the relevant economies which is the cause here. We could in fact make the same statement in two different ways. US domestic sales increased more than foreign. The US economy grew more than foreign ones did. Note that those aren't necessarily equivalent statements in all circumstances. Just that they are here in these.
As to our interest as investors. We expect the difference to persist in growth rates. Absolutely no one expects the eurozone to start booming anytime soon and it'll be the Fed raising interest rates which ends the good times in the US. Something we have no sense of the Fed doing any time soon. So, we expect this out performance of domestic sales oriented companies to continue as against those with foreign sales.
We should thus be looking to those companies with that domestic orientation to outperform the market more generally. This is clearly not a specific recommendation for any particular stock. But when looking at any one sector and thinking between several possible choices for exposure to the structural changes happening we might want to put the thumb on the scales for the domestic sales oriented company as opposed to the foreign.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.