When it comes to big US companies with investment-grade credit ratings, America already is great.
In a note to clients on Monday, Hans Mikkelsen at Bank of America Merrill Lynch highlighted the earnings volatility among big US corporates with minimal international exposure against those with more internationally focused profit.
And while more globally-facing businesses have been pressured on the bottom line by sluggish global growth and the strength of the US dollar, US-facing corporates have been steady and resilient.
Here’s Mikkelsen (emphasis mine):
We continue to find it striking how well domestically-oriented US high grade companies — which we define as those with less than 25% sales exposure to foreign countries — have performed after the financial crisis. We see this as over the past six years EBITDA and revenue growth averaged 6.5% and 4.5%, respectively, with remarkably little variation from quarter to quarter. We find that globally-oriented US HG companies — which we define as those with more than 50% of revenue coming from abroad — constitute the main source of earnings volatility for US HG companies… Unless the dollar strengthens materially from here (note that our house view calls for modest appreciation) — which seems unlikely given that the weak global backdrop limits the ability of the Fed to hike rates aggressively — and/or commodity prices again plunge materially, it appears that the worst is behind us for globally-oriented US HG companies. We think the story is very simple: continue to take a “glass half full” view on corporate fundamentals.
In the second quarter, earnings for the S&P 500 were down 3.2%, the first time the index has seen five-straight quarters of year-on-year earnings declines since the financial crisis, according to FactSet.
Additionally, concerns have been raised about how much buying back stock has boosted corporate profits rather than organic business growth.
But in Mikkelsen’s view, the profit success of big US companies indicates that the health of the stock market — and corporate America more broadly — might be a whole lot better than you think.