In this paper, we examine the geographic revenue distribution of the S&P 500 and see what, if any, impact foreign economies and geographically driven market events may have on overall index performance.
We examine a recent market event, the 2016 U.S. election, as a case study. To aid in the analysis, we use two stylized portfolios based on geographic revenue data. The time period studied is from Election Day (Nov. 8, 2016) to year-end 2017, a period of robust performance and record highs for the S&P 500.
We review the performance of companies in the index through the lens of geographic revenue information. To decompose the performance, we first investigate the potential impact that currency movements may have using the U.S. Dollar Index performance and the Northfield U.S. Macroeconomic Risk Model. We then take a closer look at the individual GICS® sectors and run sector-driven performance attributions of the stylized portfolios.
INTRODUCTION – THE S&P 500 HAS GLOBAL EXPOSURE
The S&P 500 is widely considered to be one of the best single gauges for the U.S. equity market. Composed of 500 companies that are domiciled in the U.S., the index captures approximately 82% of the total U.S. equity market value. An index of U.S. companies may lead one to initially assume that the index is exclusively dependent on the health of the U.S. economy. In reality, the index is more global than one may think. Many U.S. corporations have a global presence, with assets and revenues in or from foreign countries. Therefore, certain global events can have a material effect on S&P 500 companies and overall index performance.
To better understand where S&P 500 companies’ revenues are coming from, the FactSet Geographic Revenue Exposure (GeoRevTM) dataset was used. This dataset gives a geographic breakdown of revenues for all companies with available data. This data showed that nearly 71%3 of S&P 500 revenues came from the U.S., while the remaining came from foreign markets. Internationally, the largest individual countries by total revenue percentage included China (4.3%), Japan (2.6%), and the UK (2.5%).
Given the data shown in Exhibit 1, it is evident that the S&P 500 has material exposures to foreign economies. As such, domestic and global events or policies that change the dynamic between the U.S. and foreign markets can potentially have an effect on the performance of the S&P 500. In the next section, we investigate how the global market exposure of the S&P 500 has affected index performance.