February 13, 2019
Scott Wren, Senior Global Equity Strategist
Why the Rest of the World Matters to S&P 500 Earnings
S&P 500 Index and sector revenue mix
Over the last few years, we have been telling investors that 35% to 40% of revenues for the S&P 500 come from outside the U.S. Based on the most current FactSet data, 37.4% of revenues are earned outside the domestic economy.
Today, investors are focused on the potential for a significant economic slowdown in China. The chart shows that not all S&P 500 large-cap sectors have meaningful China exposure. In fact 6 of 11 sectors earn less than 4% of their total revenue in China. The Information Technology sector sees a touch over 14% of total sales coming from China—by far the largest percentage of any sector, followed by Industrials, Materials, and Consumer Staples.
What it May Mean for Investors
Because nearly 40% of S&P 500 Index revenues come from outside the U.S., we need help from international economies in order to reach our 2019 earnings expectations. Looking at the four equity sectors with the great exposure to China, we are most favorable on Industrials, favorable on Information Technology, and neutral on Materials and Consumer Staples.
Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks.
Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Consumer Staples industries can be significantly affected by competitive pricing particularly with respect to the growth of low-cost emerging market production, government regulation, the performance of the overall economy, interest rates, and consumer confidence. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks smaller, less-seasoned companies, tend to be more volatile than the overall market.
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S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.
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