Morgan Stanley's Gerard Minack calls outperformance of U.S. stocks versus global stocks "the most obvious feature of global equities over the past two years."
What's been driving U.S. outperformance?
Looking at where those U.S. companies are sourcing their earnings from is an interesting way to look at this.
In a note to clients, Minack provides the chart below, which shows earnings expectations for American companies that generate most of their sales at home versus those American companies that generate most of their sales abroad.
"P oor performance of foreign-focused earnings fits the long-standing (and unsurprising) link between growth in America’s trading partners and foreign-sourced profits," says Minack.
Since several of America's largest trading partners are grappling with weak economies, and the U.S. economy is expected to outperform in the coming years, the chart above makes a lot of sense.
However, that's only part of the story.
Minack points out that " GDP growth in emerging markets has been stronger than in the U.S., but earnings delivery worse over the past two years."
The difference is margin expansion, which U.S. companies have experienced plenty of in recent years.
And the key to that margin expansion – "the single most important factor," according to Minack – is falling per-unit labor costs.
" My colleague, Adam Parker, doubts that margins will improve this year to the extent implied by consensus forecasts for US earnings," concludes Minack. "To the extent that margins have been assisted by fiscal easing, the significant fiscal tightening now being introduced suggests that the gap between US-sourced and foreign-sourced earnings may narrow in coming quarters."
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