FOREIGN ACCENTS WILL LOSE CHARM FOR U.S. STOCKS / THE WALL STREET JOURNAL

Foreign Accents Will Lose Charm for U.S. Stocks

The boost U.S. companies have been getting from their overseas operations is about to go away

By Justin Lahart


A run of strong earnings from retailers such as Walmart suggests that Americans are stepping up spending. Photo: Timothy Fadek/Bloomberg 


The world is about to become a tougher place for American companies. 
U.S. corporate profits have been strong and, while a strong domestic economy and lower taxes have provided a huge boost, investors shouldn’t discount the important role the global economy has played. An unusual period of synchronized growth has both bolstered companies’ overseas sales and, until recently, strengthened other countries’ currencies, lifting their value when translated into dollars. A recent FactSet analysis found that second-quarter earnings at S&P 500 companies that do more than 50% of their sales from overseas was up 13.5% in the second quarter from a year earlier. At companies that did less than half of their business overseas, earnings grew by 8.6%.

Lately, though, there have been some cracks in the global growth story. Turkey’s financial woes and collapsing currency have rekindled worries about emerging market vulnerabilities. China’s economy is decelerating and a slowdown in Chinese investment suggests there is more to come.

Manufacturing surveys show that global factory-sector growth reached its peak in January, falling since then. The trade spats the U.S. has entered into could weigh further on overseas growth, particularly for export-oriented economies. In turn, retaliatory tariffs against the U.S. could hurt American companies as customers overseas look for alternatives.

Compounding the problem for U.S. companies, all of these issues—Turkey’s troubles, China’s slowdown, cooler manufacturing growth and trade disputes—have bolstered the dollar’s value. So far this quarter it is averaging 4.5% higher than a year ago, on a trade-weighted basis. That will exert a drag on U.S. companies’ overseas profits for the first time in five quarters.

Meanwhile, the domestic economy continues to do well. A run of strong results from retailers such as Walmartin recent days suggests that Americans are stepping up spending. In the months ahead, companies that do all or most of their business at home ought to do well. Investors should notice this, gravitating toward stocks with a little less global flair.