(Bloomberg Opinion) – Donald Trump’s brewing trade war could have another collateral victim: Americans’ retirement savings.
The second quarter officially ended on Friday. By next week, large U.S. companies will start reporting how they did during the period. Most analysts think those reports will be rosy. Overall, earnings for companies in the S&P 500 Index are expected to rise slightly more than 20% from a year ago, which is the second fastest quarterly pace since 2010, according to FactSet. Sales are are expected to be up an average of nearly 9%.
Normally, that would be unqualified good news for Americans’ retirement accounts. S&P 500 Index funds make up three of the top 10 largest holdings of Americans’ 401(k) accounts, according to consulting firm Brightscope, which ranks top 401(k) holdings but doesn’t disclose actual amounts. The Vanguard Institutional Index fund, which tracks the S&P 500, has more than $225 billion in both 401(k) and non-401(k) assets, about 50 percent bigger than the No. 2 Fidelity 500 Index Investor fund.
The nascent problem is the second quarter is expected to be an even better earnings season for U.S. companies that get much of their business from overseas, according to a recent report from John Butters, FactSet’s senior earnings analyst. He split the companies in the S&P 500 into two groups — those that generate 50% or more of their sales outside the U.S. and those that don’t. Butters found that the bottom lines of the companies in the first group are expected to grow by nearly 24% in the second quarter, compared with 17% for the companies in the second group. The same trend held for sales, up nearly 13% for the first group compared with 7% for the second.
This is where the tariffs come in. The second quarter will give the first look at whether fears of a trade war have disrupted those overseas earnings. Probably not yet, at least according to analysts. That’s why they are predicting stronger earnings, though those high expectations do present the possibility that they could fall short of forecasts.
The real question is what effect Trump’s escalating trade war will have on profits for the rest of the year. And it’s not just tariffs that threaten to choke off the foreign sales of U.S. companies. Outside the U.S., global economic growth, which seemed certain a year ago, appears to be fading. On top of that, the dollar is up about 5% in the past three months compared with other global currencies; that’s more bad news for U.S. exporters, making their goods more expensive overseas.
Indeed, RBC strategists noted last week that the projections for S&P 500 companies with a high percentage of international sales have started to fall. Companies with more domestic exposure have not experienced the same downward sales revisions from analysts.
That’s why the tariffs matter so much. The S&P 500 has a price-to-earnings ratio of 16.9 based on next year’s earnings. That market valuation is based on a steady sales growth rate at least in the high single digits, if not higher. About 40% of the sales of the companies in the S&P 500, but an estimated 60% of the sales growth, come from overseas, according to Butters’s numbers. If a trade war chokes that off, it’s hard to see how stocks stay at current heights.
And now we’re talking a blow to 401(k)s. The news last week that Harley-Davidson Inc. was moving some jobs overseas was received with some condemnation but not a huge backlash. A few jobs is a price, it appears, Trump and his supporters are willing to pay. A sustained drop in the investment that makes up the core of most Americans’ retirement savings might be another story.