Large-capitalization stocks with high international revenue in the S&P 500 index have been outperforming domestically oriented companies as a better-than-feared economic backdrop in Europe and China’s recovery from the coronavirus pandemic has fueled optimism about non-U.S. equities, said a strategist at RBC Capital Markets. Large-cap companies with high international revenue exposure have only been seeing “modest” downward earnings per share (EPS) revisions, which represents an improvement from 2022, when these stocks experienced the rate of upward revisions fall sharply to around 20%, said Lori Calvasina, head of U.S. equity strategy of RBC Capital Markets, in a Monday note (see chart below).
Conversely, large-cap stocks with entirely domestic revenue exposure “have started to see the rate of upward EPS estimate revisions deteriorate,” which comes after an extended period in which downward revisions were “modest and much more resilient” than those in the high international cohort.
SOURCE: RBC US EQUITY STRATEGY, S&P CAPITAL IQ, RBC ELEMENTS
“It’s fair to say that the high international bucket has been more de-risked from an earnings perspective, and that the domestic cohort is yet another former leadership area that is finally taking its lumps,” wrote Calvasina. “After an extended period in which domestic names outperformed, the high international bucket has been outperforming over the past few months including early 2023 trading.” Calvasina thinks the shift indicates a trend in which U.S. investors have gradually increased their exposure to non-U.S. assets as the economic backdrop in Europe has been better-than-feared and as China’s economic reopening has ignited optimism about the country’s economic growth. See: Small-cap stocks outperform so far in 2023 as U.S. equities book second week of gains this year On Monday, French Finance minister Bruno Le Maire said the economic situation of the European Union is better than feared, citing more positive-than-expected economic results. European stocks rose to a near nine-month …