The global economy is slowing, but the US dollar is gaining strength. And that could be bad news for the giant companies in the Dow and S&P 500 that generate more of their sales overseas than in America.
The good news: Investors might have already priced in that problem late last year, when the markets plummeted.
Multinationals like Apple, Caterpillar, Intel and McDonald’s are expected to do much worse than S&P 500 companies with less international exposure when they start reporting first quarter results next month.
S&P 500 members that make most of their sales outside of the United States are expected to report a more than 11% decline in first quarter earnings compared to a year ago, according to data from FactSet. That’s compared to a 1% increase in profit for companies that do more business stateside.
There are plenty of factors: Trade tension between the United States and China is one problem, as is China’s economic slowdown. Economic weakness in Europe isn’t helping matters for blue chips that have a major presence overseas.
All the while, the US dollar has rallied this year — a double whammy for multinationals. The stronger greenback makes US goods less competitive overseas. And the value of international sales is reduced once translated from local currencies back into dollars.
But investors already seem to have figured out that the first quarter would be terrible, hence the market chaos that dominated November and December. The rebound this year could be a sign that investors expect profits to improve later in 2019.
“Most companies have done a nice job of making investors aware that there will be these headwinds in the first quarter,” said Jim Tierney, chief investment officer of concentrated US growth for AllianceBernstein.
Pricing in bad news
Look at Apple. The company shocked Wall Street with an earnings warning at the start of the year that it attributed largely to weakness in China. But the stock has rebounded sharply since then, and is now up 13% in 2019.
Several other large multinational companies have issued downbeat forecasts for the year as well. They may simply be setting the bar low in order to beat forecasts in the coming months.
“Many emerging markets are going to continue to grow. The trade tension will eventually calm itself down. Investors need to take advantage of new markets opening up globally,” said Sean O’Hara, director of Pacer Financial, a company that runs several exchange-traded funds.
O’Hara told CNN Business that now is still a good time to bet on companies that do more business abroad. Pacer, for example, runs one ETF called the US Export Leaders, which owns large and mid-sized US companies that sell a lot of their products to international markets. That fund is up 16% this year, better than the broader market.
Think of the long term
Tierney also thinks investors should be thinking globally.
He believes there will eventually be a trade deal between the Trump administration and China. He added that China’s government has already taken steps to stimulate its economy that will lead to a pickup in GDP growth there.
The key is to bet on companies that can benefit from big, overarching trends.
That’s why Tierney said he’s still a fan of leaders such as Microsoft, MasterCard and Amphenol, a maker of antennas and other wireless connectivity devices for mobile networks. A short-term slowdown in the global economy won’t change their long-term outlooks.
Microsoft will benefit from the wider adoption of cloud computing, Tierney said, adding that MasterCard will thrive due to the growing shift towards electronic payments. He also said Amphenol could be a winner as more 5G networks are rolled out around the world.
