After the financial crisis, companies in the U.S. economy were able to show robust growth in their corporate earnings; they were able to sell their products and services to where the demand was outside the U.S., to the global economy.
Unfortunately, the tides are turning. The global economy is showing signs of weakness. Pick up a map, and point a finger to any general region of the global economy; chances are that countries there are struggling with demand, and they are revising their growth rates downward.
Companies in the U.S. economy are very reliant on what happens in the global economy. Consider this: in 2012, companies on the S&P 500 that provided figures about global sales reported that 46.6% of all their sales came from outside the U.S. economy. (Source: S&P Dow Jones Indices, August 2013.) Yes, nearly half of the sales these companies generate come from the global economy.
It doesn’t take much to see the global economy is slowing, not growing…
Take a look at the European Union—one of the biggest economic hubs worldwide. New passenger car registrations in the region were down 6.6% in the first six months of this year compared to the same period a year ago. (Source: European Automobile Manufacturers’ Association, July 16, 2013.) Europe is in trouble; American companies will have trouble growing their corporate earnings in that region.
The Chinese economy, the second-biggest economic hub in the global economy, is also slowing. A significant number of U.S. companies do business there. For 2013, the Chinese economy is on track to grow at its slowest pace in years, as problems persist in China, including risks such as the shadow banking sector, skyrocketing home prices, and slowing exports.
In the second quarter, we witnessed first-hand how fragile U.S. corporate earnings were. If we take out the financial companies from the S&P 500, the corporate earnings growth rate for the second quarter of 2013 was borderline negative.
With the global economy on the fringes, it will be even more difficult for companies to boost corporate earnings in the third quarter. Looks like the stock market itself is finally coming to that realization.
What He Said:
“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S. economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in Profit Confidential, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.