Third-quarter earnings results could be producing a paradigm shift for US companies, in which multinationals fuel an economic recovery that strictly domestic companies cannot.
While the trend of US companies branching overseas is certainly nothing new, the extent to which emerging market demand could pull the country out of a recession is.
Developing economies such as the BRICs—Brazil, Russia, India and China—slumped during the global financial crisis, but appear to be back now that financing is available and the worst of the credit calamity has passed.
"We might go into a period of a decade where global growth is a driver of the world economy, and that's not necessarily a really bad thing for the United States," says Jordan Kimmel, market strategist at Boyar Asset Management in New York. "When we hear the consumer is dead, they're certainly not talking about the consumer in lots of Asia, lots of Latin America, wherever there's significant growth taking place."
One of the principal themes of the latest earnings season has been companies raising their forward guidance.
"The fact is we don't have to wait for the American consumer to come around if you're involved in companies that have involvement overseas," Kimmel says.
While the reliance on foreign demand to drive US-based company earnings might seem like a poor reflection of the American economy—indeed, Caterpillar shares actually fell Thursday despite the earnings beat—it's something to which investors may have to become accustomed.
"The ground-zero for global growth is no longer the US. It's starting to come from overseas, it's from emerging countries," says Michael Vogelzang, president and chief investment officer at Boston Advisors. "Those are the folks who are sustaining us through a bear market and are providing the opportunity for companies that are well-positioned to do better."
Vogelzang says there's a saying in his office that is part humorous and part true: "It's China's world. We're all just living in it."
"That will be more and more the way the world works," he says. "At the end of the day emerging market countries are much more fiscally conservative than we are. The West and the developed countries have this long path of worry about trying to pay off debt for the next decade. As a result you're going to see subpar growth from domestic areas and developed areas."
At the same time, those developing markets aren't being shy about investing in their growth.
Emerging market debt issuance has eclipsed its historical record this year, with $162.5 billion in high-yielding notes in the marketplace. That total includes $30.5 billion in September alone and $11.6 billion in just the past week, according to Bank of America Merrill Lynch Global Research.
While that may sound a bit like a bubble is building much like what happened before the US housing market collapsed, companies are reaping the benefits of the growth.
"Emerging markets are definitely where demand is going to be in the next decade or two," says Keith Springer, president of Springer Financial Advisors in Sacramento, Calif. "The problem is these economies rely on the Western world for capital. Their economies are are not mature enough to withstand a big hit."
Springer sees US earnings driven as much by companies that have increased efficiency during the recession, and are learning how do to more with less while benefiting from the dearth of domestic competitors, particularly in the goods-producing industries.
But that may not be enough, he says, because the economy is relying too much on cheap money from the Federal Reserve that won't be there once interest rates are forced up.
"The government is not fixing the problem, going to the root of the problem, and adjusting. What they do is create bubble after bubble to get us through the next couple of years," Springer says. "What you need to do is let the economy reset to the level of demand rather than create artificial demand."
Yet for companies trying to maintaining bottom-line profits while managing some top-line growth, the current formula may have to do while current conditions prevail.
"Corporate America is doing substantially better than retail America. as a result, corporate earnings are ahead of Main Street," Vogelzang says. "It's the global reflation theme. The bigger companies that are tied to the emerging markets trades are doing the best."
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