Globalization, the integration of international markets, is turning from a tailwind to a headwind for the earnings and revenues of large U.S. companies.

According to a recent FactSet Geographic Revenue Exposure report, S&P 500 companies with more than 50% overseas sales underperformed those with less than 50% sales presence.

"The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the S&P 500 for Q1 2023 is -2.2%," John Butters, vice president and senior earnings analyst at FactSet, said. "For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 2.7%. For companies that generate more than 50% of sales outside the U.S., the blended earnings decline is -10.2%."

The comparison between the two company groups follows a similar revenue growth pattern.

"The blended revenue growth rate for the S&P 500 for Q1 2023 is 3.9%," Butters said. "For companies that generate more than 50% of sales inside the U.S., the blended revenue growth rate is 6.1%. For companies that generate more than 50% of sales outside the U.S., the blended revenue decline is -2.1%."

That's a significant difference from a year ago when globalization was still a driver of S&P 500 revenues and earnings. And that's despite the weak dollar, which made U.S companies more competitive vis-à-vis their overseas peers.

What makes the difference this time around? A significant slowdown in the sales and earnings of three companies: Moderna, Pfizer and Intel.

"All three companies reported year-over-year decreases in earnings and revenues of more than 20% for Q1 2023," Butters explained. "Both Intel and Moderna generate more than 70% of revenues outside the U.S., while Pfizer generates just under 60% of revenues outside the U.S."

The change in the overseas fortunes of the three companies has very little to do with specific factors rather than general factors like the fluctuations in the value of the dollar and the degree of integration of the world markets.

Pfizer and Moderna suffered from a slowdown in sales due to the end of the COVID-19 pandemic, while Intel has suffered from the creative destruction of its businesses, which has yet to yield meaningful results.

Still, Piyush Tripathi, lead engineer for Square, Inc., thinks the shortfall in earnings and sales of companies with significant exposure to overseas markets is broad. He has observed a similar pattern in the small and medium-sized business (SMB) loan program launched by Square. "Through this initiative, we witnessed a significant increase in domestic revenue, similar to the surge attributed to the higher revenue figures seen in the Consumer Discretionary sector per user," he told International Business Times.

"It appears that globalization is currently posing more challenges for businesses operating in international markets, while Orgs focused on their domestic markets, such as Amazon, are benefitting from the positive momentum," he elaborated. "These observations underscore the shifting dynamics of globalization, with U.S. corporations experiencing a transition from perceiving globalization as a supportive force (tailwind) to one that presents obstacles (headwind) in terms of earnings and revenue growth."

The shifting dynamics of globalization hurts corporate performance in two ways. One, it limits the search for new business opportunities, allowing companies to expand their operations' scale and scope. And two, it undercuts the efficiencies associated with lower transaction costs and better sourcing, which help companies cut costs.

Mark Mitchell, chief research analyst at Covenant Venture Capital, blames geopolitics for the new globalization landscape. "Exposure to international markets means exposure to geopolitics," he told IBT. "If a market where the U.S. company is participating is facing a crisis, such as Ukraine (and by extension, Europe), consumer behavior can also impact sales/revenue."

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