The Stock Market is Not the Economy in an Important Way

(Yahoo!Finance) - The U.S. economy is closely related to the U.S. stock market. But that relationship is not perfect in a number of ways.

An important way the two differ is international exposure.

According to FactSet, S&P 500 companies

1. generate around 40% of revenue outside of the U.S.
2. That means these companies are significantly dependent on the health of the international economies in which they operate. They employ abroad, source goods abroad, and sell abroad.

This is not to say the U.S. economy is totally decoupled from the rest of the world: Annual exports account for $3 trillion of the $25 trillion worth of U.S. GDP.

The S&P 500 is a global story. (Source: <a href="" rel="nofollow noopener" target="_blank" data-ylk="slk:FactSet" class="link ">FactSet</a>)

The S&P 500 is a global story. (Source: FactSet)

But when you think of the U.S. economy, you generally think about activity inside the borders of the U.S. This includes U.S. employment levels, U.S. manufacturing activity, U.S. services sector activity, etc. This, by the way, includes non-U.S. companies with footprints in the U.S. like Toyota, B.P., Samsung, and Nestle.

We’re discussing this now because of news from FedEx FDX -1.25%↓ , a U.S.-based S&P 500 company. From the company’s press release on Thursday (emphasis added):

First quarter results were adversely impacted by global volume softness that accelerated in the final weeks of the quarter. FedEx Express results were particularly impacted by macroeconomic weakness in Asia and service challenges in Europe, leading to a revenue shortfall in this segment of approximately $500 million relative to company forecasts. FedEx Ground revenue was approximately $300 million below company forecasts.

FedEx is one of the so-called “early reporters” — that is, companies whose quarters end a month earlier than most companies. The last two months of FedEx’s quarter overlaps with the first two months of most companies’ Q3. And so the company’s warning may serve as a leading indicator for the upcoming Q3 earnings season, which kicks off in mid-October.

As Asia struggles with COVID-related lockdowns and Europe wrestles with surging energy costs, companies with significant exposures in these regions may underperform those with greater dependence on the U.S., where the economy has been resilient.

There’s also the matter of the surging U.S. dollar, which is leading to the dollar value of revenue generated abroad shrinking for U.S.-based multinational companies. Morgan Stanley analysts recently estimated that every 1% increase in the dollar index represents a roughly 0.5% reduction in S&P 500 earnings per share.

While dollar strength may be good news for U.S. importers and American vacationers traveling abroad, it’s bad news for everyone else watching their own currencies lose purchasing power in the international markets.

All of this raises doubt about analysts’ current forecasts for earnings growth, which appear at risk of getting revised down further. This is a big deal because, as TKer readers know, earnings are the most important driver of stock prices over the long run.

For investors and traders, the key question is what’s priced into the markets. The strong dollar and economic weakness abroad are known stories that have weighed on markets for a while. So, while these are clear headwinds, it’s very possible to see markets climb as analysts factor in the deteriorating macro backdrop into their earnings forecasts.

By Sam Ro · Contributor


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