Retail Industry Up 18% Year To Date (S&P 500 Up Only 2%)

America Set To Outperform?

Analysis have been toying with the thesis that America might take a strong leadership role in the growth of advanced economies. This would expand the S&P 500’s earnings multiple as capital comes back to America. America has weak competition as there has been a slowdown in Europe; South Korea has seen weakness in mining and exports. The Fed is raising rates faster than the other advanced economies’ central banks. Remarkably, the U.S. core CPI is 2.1%, while European inflation is 1.2% and its core inflation is 0.7% in April. If America does outperform the other advanced economies, the dollar will increase, which will stem earnings growth and eventually stymie the rally in the S&P 500. Specifically, the Russell 2000 might outperform because it has more domestic exposure than the S&P 500. Recently, the Russell 2000 has rallied as it is less than 1% away from its all-time high; this thesis might be playing out already.

International Earnings Growth Excels Again

As usual, the chart below shows firms with greater than 50% of sales coming from international markets have greater earnings growth than firms with less than 50% of sales coming from international markets. The sales growth of the internationally exposed firms is more than double the domestically focused firms. How does this make sense, given the U.S. focused thesis I just presented? There are a few reasons why international firms usually grow faster. The biggest internationally focused firms are in the technology sector which tends to have higher earnings and sales growth than the others. Secondly, some of the sales growth comes from emerging markets. Emerging markets have recently underperformed the S&P 500 and Stoxx 600, but a few weeks of weakness in their equities doesn’t reverse their relatively high GDP growth rate. Finally, many internationally focused American firms are taking share in these markets which means the economies don’t need to growth quickly for S&P 500 firms to grow earnings fast.

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