From Standard & Poor's Equity ResearchAs of Thursday’s close, the S&P 500 registered a year-to-date gain of 9.5% — a powerful rally from the lows touched in mid-June. A good deal of this strength is no doubt due to such commonly cited factors as lower energy prices and a plateau in interest rates, which have helped boost confidence in the economy and continued to support healthy corporate profits.
S&P Equity Strategy believes there is another important factor at work, one whose relative obscurity increases the likelihood that it will spur gains in large-cap equities as it becomes more widely recognized by market participants. That factor? America’s role in globalization’s success story.
In 2000, about 31.7% of S&P 500 revenues came from overseas. The number grew to 41% in 2005, and we expect this trend to continue. Therefore, S&P Equity Strategy believes that U.S. large-cap stocks should be valued not just on the outlook for the U.S. economy, but also on the outlook for the global economy.
S&P expects U.S. gross domestic product (GDP) growth to slow from 3.4% in 2006 to 2.3% in 2007, but we forecast global growth of 3.2% in 2007. The participation of emerging markets in the world economy — 27% of global GDP at market exchange rates, according to the International Monetary Fund — is helping to sustain healthy international expansion. The emergence of China, India, and Russia as economic powers, combined with the continued above-trend growth in Europe and Japan, means that the rest of the planet is no longer as reliant on the U.S. to drive growth. Hence, the increasing international revenue diversification of U.S. multinationals, by our analysis, will likely allow for continued solid revenue increases and help offset domestic problems, such as a weakening housing market.
In addition, S&P believes that the likelihood of further weakness in the U.S. dollar in 2007 will magnify the benefits of increased international sales diversification in the S&P 500. With an increasing percentage of sales denominated in foreign currencies, we believe a weaker trade-weighted dollar over the next 12 months will allow U.S. multinationals to repatriate more dollars, as their increasing foreign revenues are translated into U.S. currency.
To take full advantage of this powerful trend, S&P Equity Strategy recommends a large-cap focus in U.S. equity portfolios, with 34% of our 40% domestic stock allocation dedicated to this asset class. To view the complete Model ETF Portfolio, or find large-cap multinational stocks with five-STARS rankings, please visit us online at www.outlook.standardandpoors.com.