International Earnings Growth Is Outpacing U.S. Growth

By: Wayne Duggan

Third-quarter earnings season is off to a strong start for most S&P 500 components. However, not all companies are putting up big numbers. Heading into third-quarter earnings season, some investors were understandably concerned about the potential impact of global supply chain disruptions and uneven international recovery from the COVID-19 pandemic, particularly for U.S. companies that generate a high percentage of their business overseas.

So far, early earnings reports suggest international companies were actually outgrowing domestic U.S. companies in the third quarter.

The Numbers
Blended earnings numbers include both reported earnings and updated analyst estimates. So far this earnings season, the blended earnings growth rate for S&P 500 constituents for the third quarter has been 32.7%.

For companies that generate at least half their revenue inside the U.S., that blended earnings growth rate drops to 26.3%. Conversely, companies that generate more than 50% of their earnings outside the U.S. economy are reporting 44.3% earnings growth.

Revenue numbers paint a similar picture. Overall, S&P 500 companies are reporting a blended revenue growth rate of 15.3%. Companies generating over half of their revenue outside the U.S. are reporting 23.8% revenue growth, while companies generating less than half of their total revenue internationally are reporting 12.4% revenue growth.

Dollar Effects
A factor that plays a role in the relative growth rates of international companies versus domestic U.S. companies is the strength of the U.S. dollar. The dollar index started 2021 at multi-year lows, but it is now currently trading near its 52-week high.

Generally, a strong dollar is good for companies that import goods and materials from other countries because it potentially lowers their costs. However, a strong dollar is typically bad news for American companies that generate a large portion of sales outside the country. The earnings these companies generate from foreign sales will drop in value relative to their domestic earnings, potentially weighing on stock price.

The value of the dollar has been steadily climbing since May. It appears it is not weighing on international earnings too much as of the third quarter, but investors should continue to monitor the dollar index heading into 2022.

Supply Chain Disruptions
Finally, the major disruption in international supply chains, particularly in Asia, represents a wild card in the fourth quarter and beyond for U.S. companies relying on overseas suppliers. As economies around the world open back up to full capacity following pandemic shutdowns, suppliers are seeing booming demand from global consumers. Since different regions are recovering more quickly than others, a large number of suppliers are struggling to meet demand.

Unfortunately, economists say that supply chain issues could get worse in the fourth quarter before they get better in 2022. Investors who own international stocks or U.S. stocks that rely on international suppliers should pay particularly close attention to any management warnings regarding supply chain issues on company earnings calls to avoid getting caught off guard by a potentially disappointing fourth-quarter earnings report.

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