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Europe has become a surprising source of earnings growth for the S&P 500


Europe has become an important source of growth for S&P 500 (^GSPC) companies, which generate around 30% of revenue outside of the US. This is surprising for some.

The headlines coming out of Europe in recent months have often reflected instability in the continent. From Brexit to the French elections to the Turkish referendum, you’d think all of this uncertainty would be bad news for growth.

But relative to the US, growth in Europe is looking rather robust.

Outside the New York Stock Exchange
Outside the New York Stock Exchange

“The Euro area has made an important contribution to global growth with GDP projected to expand 2.25% in 1Q and 2.5% this quarter,” JPMorgan’s Bruce Kasman wrote on Friday. This compares to JPM’s forecast for around 1% growth in the US in the first quarter.

As you can see in the chart below, economic data has been surprising to the upside, with Europe in the lead.

Europe has led the upside economic surprises.
Europe has led the upside economic surprises.

RBC Capital Markets’ Jonathan Golub noted that businesses in Europe have more exposure to customers in higher growth regions, and thus should see stronger growth in their earnings per share (EPS).

“EPS in Europe are forecast to top those in the U.S for 1Q and full-year 2017,” Golub wrote. “Within the S&P 500, more export-driven companies are expected to out-earn their more domestically oriented peers.”

Businesses in Europe are benefiting from both higher revenue growth and fatter profit margins. US companies are getting a better EPS tailwind from share buybacks, however EPS growth is still much higher in Europe.

rbc earnings
Europe is looking a lot stronger than the US.

“Higher nominal GDP outside the U.S. is benefiting European firms and U.S. export-oriented names,” Golub said.

FactSet analysts also highlighted the importance of overseas exposure in a research note on Thursday.

“The earnings growth rate for the S&P 500 for Q1 2017 is 9.2%.,” FactSet’s John Butters noted. “For companies that generate more than 50% of sales inside the U.S., the earnings growth rate is 6.0%. For companies that generate less than 50% of sales inside the U.S., the earnings growth rate is 15.7%.”

earnings growth
Source: FactSet

This week comes with a wave of earnings announcements, with Netflix, Johnson & Johnson, Bank of America, Goldman Sachs, Verizon and General Electric among names announcing Q1 results.

Sam Ro is managing editor at Yahoo Finance.
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