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The trade war and global slowdown are combining to trigger a sharp drawdown in profits for U.S. multinational companies.
Companies that derive more than half their sales outside the U.S. are expected to see a 9.3% slump in second-quarter earnings as the reporting season looms about a month away, according to FactSet estimates that see the S&P 500 broadly reporting a 2.3% decline.
That means big companies like Apple and Boeing that have far-flung operations and count on business and lower costs from other countries as a big ingredient in their recipe for success. Of the S&P 500's 11 sectors, information technology is expected to see the biggest drop-off in earnings at 11.8%.
In contrast, for companies that see half their business come from inside the U.S., earnings are expected to grow 1.4% as they are not subject to the rising costs of imported goods and seeing their wares subjected to duties in foreign markets.
On the revenue side, companies with an international bias are expected to see a decline of 1.2% while domestic-facing companies are projected to see a sales gain of 6%.
The biggest gainers in earnings for Q2 are expected to be energy (3%), utilities (2.3%) and health care (2%), while losers, in addition to tech, are materials (-7.2%), staples (-2.8%) and discretionary (-2.5%). Winners on the revenue side are projected to be communication services (14.1%), health care (12%) and discretionary (3.8%), while the worst-performing sectors will be materials (-9.3%), tech (-0.9%) and industrials (1.2%), according to FactSet estimates.
"Tariffs are part of the story," said David Lefkowitz, senior equity strategist for the Americas at UBS Global Wealth Management. "But I also think there are a number of other factors that are driving some pockets of weakness in the global economy and the earnings picture for the U.S. economy."
Thus far, the U.S. has been largely shielded from any dramatic effects from either the tariffs or weakness in other developed economies. Domestic GDP rose 2.9% in 2018 and 3.1% in the first quarter of 2019, inflation has been subdued and the jobs market has held up, though it has been showing weakness lately.
The stock market has been volatile but has largely shrugged off the tariff issue as major indexes are all up double figures year to date and have gained more than 4% apiece in June.
However, more company executives, in sentiment surveys and elsewhere, have been expressing unease and warning that rising costs will begin to eat into profitability.
Wall Street analysts have taken note and are anticipating some more tangible impact to begin showing up.
"Policy uncertainty is high, especially on trade," John Lynch, chief investment strategist at LPL Financial, said in a recent note. "We have reduced earnings estimates to acknowledge the increased risk of a prolonged trade conflict. We remain optimistic that these trade disputes can be resolved this summer, though probably not until more economic pain is inflicted on the U.S. and China economies."
Investors have taken caution as well.
After yanking a record $19.9 billion out of stock-focused exchange-traded funds during the tumultuous May slide, flows have come back somewhat, but investors are still looking for safety. So far in June, fixed income ETFs have taken in $15.1 billion, just $2 billion shy of the record, according to State Street Global Advisors. For the year to date, bond ETFs have seen $63.9 billion of inflows, compared with just $28.4 billion for equity funds.
"You still have China, and it remains an unforecastable dynamic given our current administration's proclivity for randomness," said Matthew Bartolini, State Street's head of SPDR Americas research. "Investors are letting bonds be bonds and mitigating episodic risk."
That move comes at a time when some of the market's biggest names could see noticeable downward moves in earnings.
Apple, which saw 57.9% of its business come from abroad in 2017, the most recent year for which full data was available, is expected to see a 14.6% quarterly drop in earnings and a 10.3% decline from the same period a year ago, according to data from FactSet and S&P Dow Jones Indices.
Boeing, which derives 54.7% of its sales internationally and also has experienced serious issues with its 737 Max model, is looking at a 43.7% quarterly earnings drop and a 45.6% decline from a year ago. And chipmaker Intel, which gets a full 80% of its revenue overseas, is projected to be off 14.4% from its profit for the same period in 2018.
It's not just earnings — individual company stock prices have fallen as well.
Bartolini screened for stocks with a majority of foreign sales versus those with more domestic-facing businesses, and found that as of Tuesday the former group is down about 2.5% since May 1 while the latter is off just 0.48%.
"We have investors moderately moving back into risk. It will be interesting to see if this continues, particularly as earnings season begins," he said.
Another area that bears watching is retail. The sector is susceptible to tariff risks due to input costs, and the inability to pass the costs on to customers in a noninflationary environment.
"We think most brands lack the pricing power to offset cost increases and see risk to specialty retailers if no trade deal is reached and apparel is tariffed," Lorraine Hutchinson, research analyst at Bank of America Merrill Lynch, said in a research note.
"We think retailers will have difficulty raising prices even by the 2% needed to offset a 25% tariff as competition has led to a deflationary apparel CPI for much of the past 20 years," the analyst said.
A further risk for retail comes from the potential for a slowdown in tourism that would come with escalating tensions between the U.S. and China. Tiffany and Tapestry would face the biggest downside risks, with respective exposure of 28% and 17%, Hutchinson added.