In 2010, on average, for every one dollar in sales posted by the S&P 500 companies, $0.135 came from Europe. In 2011, this number declined to $0.11. In 2012, sales from Europe accounted for only $0.097 for every one dollar of sales generated by the S&P 500 companies. (Source: S&P Dow Jones Indices, August 2013.) These statistics should not be taken lightly.
The debt ceiling fiasco and the U.S. government shutdown are front and center now. Europe has been pushed to the back of the stage in spite of the fact that continued troubles there will have a negative impact on the S&P 500 companies.
Even though there has been growing optimism towards Europe, the region’s troubles are staggering. Unemployment in the common currency region of Europe remains ridiculously high. Bad debt is everywhere, and economic uncertainty remains high.
England, one of the biggest economic hubs in Europe, looks to be stalling once again after seeing menial growth. British industrial output declined 1.1% in August. This was the biggest drop since September of 2012. Output in the manufacturing sector fell 1.2% and other sectors, such as pharmaceuticals, electronics, and food and beverages, witnessed a decline as well. (Source: Reuters, October 9, 2013.)
Europe is an integral part of the global economy. The longer it takes for Europe’s economy to recover, the more scrutiny there will be on the revenues of S&P 500 companies. In the third quarter of this year, revenue growth for the S&P 500 is expected to be 2.6%. In the second quarter, it was three percent. (Source: FactSet, October 4, 2013.)
Sure, the S&P 500 companies can buy back their shares to make their earnings per share look better, but they can’t fudge revenue growth.
When revenues start to decline and the financial engineering stops working, S&P 500 companies have to take the necessary steps to keep profits from going down—meaning more job cuts and larger cash hoards. How can this economy ever grow under those conditions?
What He Said:
“As investors we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: Recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in Profit Confidential, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.