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Capital Market Impact

Earnings under pressure from a potential global slowdown

September 15, 2022

The global economy shows signs of strain due to crippling energy prices, a post-COVID recovery hangover, and tightening monetary moves from more of the world’s central banks. Aggressive rate hikes by the Federal Reserve and sluggish growth in Europe and Asia have driven the U.S. dollar index to a 20-year high, further exacerbating inflationary pressure. The Bloomberg Recession Probability Indicator notes a 55% chance of a recession in Europe and a 25% chance in Japan over the next 12 months.

A strong dollar is a headwind for domestic earnings, making it more difficult for U.S. firms to compete with foreign companies. U.S. dollar strength also means firms convert global profits to dollar earnings at a lower rate. Sluggish growth and a strong dollar are likely to pressure corporate earnings estimates for next year, which currently project 8% earnings-per-share (EPS) growth for S&P 500® Index companies.

Share of company revenues from domestic US vs non domestic US sources

The impact, however, may vary for firms across different sizes and sectors of the economy. For example, roughly 40% of revenues for large-cap companies (as represented by the S&P 500) come from outside of the U.S. For small-cap companies represented by the S&P Small-Cap 600 Index, that figure is just 20% of total revenues. Additionally, the technology sector is the most exposed to a global slowdown; 58% of revenues for tech firms come from non-U.S. markets. On the other hand, traditional value sectors (e.g., utilities, real estate, and financials) have predominantly domestic exposure and may be sheltered by downturns in overseas economies.

If the U.S. economy shows to be more resilient than international economies, it may put smaller companies and value-oriented companies at an advantage.


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