A Statistic to Know

Last fall, Jesse Colombo wrote,

it is important to realize that around 50 percent of the SP500’s earnings are generated overseas

This means that our stock market is to some extent decoupled from our economy. Statistics like ratios of corporate profits to GDP are not necessarily going to be indicative of movements in income shares. Imagine a foreign subsidiary getting profits without generating and GDP whatsoever.

4 thoughts on “A Statistic to Know

  1. So if markets are globally integrated and the underlying economic exposure of owning an S&P 500 ETF is pretty similar to an MSCI EAFE ETF or a EuroStox ETF or what have you, then is this driving some of the divergence between Developed and Emerging market stocks over the past few years? That is, why buy in EM markets where costs are high, transparency may be low, etc, when you can buy an S&P 500 ETF can get the same revenue bundle but with effectively no transaction costs and the benefit (?) of the U.S. legal system?

  2. A good reason to use GNP for that purpose rather than GDP or at least in addition to GDP.

  3. A big reason why a majority of S&P corporate profits are reportedly earned abroad is so to minimize or eliminate their US corporate tax liability. Many multinational companies (incl Apple, IBM and GE) manipulate transfer prices to create accounting profits in low tax jurisdictions and pay zero corporate taxes to the US federal government. They also sell intellectual capital developed by staff working in the US to mailbox subsidiaries located in low/no tax jurisdictions such as the British West Indies. These techniques have generated huge cash hoards that can be used to buy back company stock, speculate in stock and futures markets located abroad or purchase companies abroad.

    • It’s certainly true that US companies manipulate transfer pricing to shift profits outside the US; but, you are overstating the case.

      1. “These techniques have generated huge cash hoards that can be used to buy back company stock..”

      This is an “investment in US property” that subjects that amount to US corporate income tax on a deemed dividend from the foreign subsidiary to the extent of the earnings of that sub. See, Section 956.

      2. ‘…speculate in stock and futures markets located abroad…”

      There is not a significant amount of that going on by non-banks and, to the extent it is, it is subject to PFIC and Subpart F rules”. Where the market is located is completely irrelevant to the tax consequences.

      3. “or purchase companies abroad.”

      Yep. And that was pretty much the point of the original observation. Those companies abroad generate foreign earnings and our tax laws encourage reinvesting those earnings abroad rather than repatriating them. The market for the products and services of large cap US companies (like those comprising the S&P 500) is global and that is increasingly reflected in the composition of their earnings. Given that the purchasing power of US residents is much less than half of the global total, I’m surprised the percentage of foreign earnings is not higher than it is.

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