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Large-cap stocks with high international exposure outperform domestics on non-U.S. stock optimism

Large-cap high-income international stocks in the S&P 500 are outperforming domestic companies as a better-than-expected economic backdrop in Europe and China’s recovery from the coronavirus pandemic fueled optimism about non-U.S. stocks, an RBC Capital Markets strategist said. .

Large-cap companies with high international revenue exposure are experiencing only “modest” earnings per share (EPS) revisions, an improvement from 2022, when these stocks saw the rate of upward revisions plummet to about 20%, he said said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a note on Monday (see chart below).

In contrast, large-cap stocks with fully exposed domestic earnings “have begun to see the rate of EPS estimate revisions deteriorate,” which comes after a longer period in which downward revisions were “modest and much more resilient” than those in high international sector. cohort.

SOURCE: RBC US EQUITY STRATEGIES, S&P CAPITAL IK, RBC ELEMENTS

“It’s fair to say that the high international bucket is more de-risked from an earnings perspective, and the domestic cohort is another area of ​​ex-management that is finally taking its lumps,” Calvasina wrote. “After an extended period in which domestic names outperformed, the high international stock market outperformed over the past few months, including early 2023 trading.”

Kalvasina believes that this change points to a trend in which US investors have gradually increased their exposure to non-US assets, as the economic backdrop in Europe has been better than feared and as the reopening of China has fueled optimism about the country’s economic growth.

see: Small-cap stocks outperform so far in 2023 as U.S. stocks record second week of gains this year

French Finance Minister Bruno Le Maire said Monday that the economic situation in the European Union is better than feared, citing better-than-expected economic results. European shares rose to a near nine-month high on Monday with the pan-European STOXX 600 index SKSKSP,
+0.40%
closing at the highest level since April 21, 2022, according to Dow Jones Market Data.

China on Monday reported GDP growth of 3 percent for 2022, the second-slowest pace since the 1970s, but beat market expectations. Chinese Vice Premier Liu He said on Tuesday the country welcomes foreign investment and predicted the world’s second-largest economy would “normalise” as Covid-19 restrictions ease after three years of isolation from the pandemic.

see: Fund managers are ‘much less bearish’ than in the fourth quarter, according to the latest Bank of America survey

U.S. stocks fell on Tuesday after investors returned from the three-day Martin Luther King Jr. weekend. and assessed the results of large banks in the fourth quarter. Dow Jones Industrial Average DJIA,
-0.99%
fell by 378 points, or 1.1%, to 33,929. S&P 500 SPX,
-0.08%
lost less than 0.1%, and the Nasdaq Composite COMP,
+0.21%
slightly increased by 0.2%.

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