Global Economy in Sharp Slowdown; U.S. Companies’ Earnings at Risk

Global EconomyNo matter where you look, major economic hubs in the global economy are struggling to show growth.

According to the German finance ministry, Germany’s economy grew at only 0.3% in the second quarter of this year after growing a similar amount in the first quarter. (Source: Reuters, July 19, 2015.) Germany is the fourth biggest economy in the world.

China, the second biggest economy, saw its gross domestic product (GDP) grow at an annual pace of seven percent in the second quarter, the slowest growth the Chinese economy has experienced since the global financial crisis of 2009. (Source: The Guardian, July 15, 2015.). In recent history, China’s economy had been growing at 10% per year. Its stock market is in a free fall.

Japan, the third biggest economy, has been in and out of recession for years now. According to the Bank of Japan, the country’s GDP is expected to increase by just 1.5% to 1.9% in fiscal year 2015, down from the bank’s April forecast. (Source: Bank of Japan, July 15, 2015.)

And the biggest economy in the world, the U.S., experienced negative GDP growth in the first quarter of this year.

So you have the four largest global economies seeing declining growth here in mid-2015.

Understand this: as the major economies struggle, smaller countries will follow them. From there, we will see a snowball effect. For example, as China’s economy is slowing, major China trading partner Australia is seeing its economy suffer.

Global Economy Slowdown to Impact Earnings

Over the past few years, U.S. companies have increased their exposure to the global economy. The idea was very simple; the dollar was declining and other currencies were going higher. The conversion of foreign currency sales into U.S. dollars made the revenue and earnings of American companies look great.

In fact, in 2014, according to S&P Dow Jones Indices, 47.82% of all sales on the S&P 500 came from outside the U.S. economy. This was the highest on record since 2009! (Source: S&P Dow Jones Indices, last accessed July 20, 2015.)

But as it stands, the dollar is rising in value against other major global currencies, putting pressure on the revenue and earnings of the S&P 500 companies that do sales abroad. Look at the chart below of the U.S. dollar index. You will see that the greenback has been on a tear versus other major global currencies since July of 2014.

US Dollar Index Chart

Chart Courtesy of www.StockCharts.com

There are too many problems in the global economy, and when this is the case, investors usually rush to the greenback. Meanwhile, the Federal Reserve is adamant about raising interest rates, pushing the U.S. dollar even higher.

So, aside from the U.S. economy slowing down itself, you have half of the S&P 500 companies doing business outside the U.S. and facing currency pressure on their revenues. With this, it would be foolish to assume that this year will see the stock market providing the same returns it did in 2013 and 2014, as the most basic factors that drive the stock market higher—corporate earnings—are in jeopardy.