the source of S&P profits

A reasonable guess (meaning my guess) is that half the profits of the S&P 500 come from outside the US. Yes, the SEC requires publicly traded companies to disclose in their 10Ks the geographic breakout of their earnings. But this dictum, like the required line of business table, is, as I see it, more honored in the breach than in meaningful disclosure.

Why the need to guess? Two reasons. For competitive reasons, companies are loathe to reveal anything about their inner workings to the outside world, and especially to competitors, who can access the SEC Edgar site as easily as the rest of us. In addition, the availability of tax havens around the world gives firms scope to recognize costs in high-tax countries and associated profits in, say, the Cayman Islands.

The Russell 2000 index of smaller stocks is much more US-centric, with something like 4/5 of its profits derived domestically. So it’s much more a bet on the US economy than of the appeal of US company offerings to a worldwide audience.

a shift in market focus?

My feeling is that one is underway. Year to date, the Russell 2000 is up by about 9%. This compares with +18% for the S&P 500 and +23% for NASDAQ. But the Russell has gained the whole 9% over the past week. This compares with +1% for the S&P and +0.6% for NASDAQ.

Part of this is valuation. Over the past year, NASDAQ is ahead by 31%, the S&P by 25%. In contrast, before last week the Russell 2000 was +6%.

To my mind, individual stock analysis is way more important than index affiliation. But my guess is that there’s still a lot more life in what I’m reading as at the very least a tactical switch away from the past year’s AI-related winners.

I should note that, thanks to one of my sons, I’ve had a large position in NVDA from back when it made video chips. Like any stellar growth company, it has morphed itself a number of times. I’ve been sell slowly for some time, mostly because of position size. My reading of the income statement is that the operating margin expansion that has helped drive profits growth may be reaching a peak, which is a potential concern–if we assume that those who didn’t see this source of operating leverage before are still in the dark.

–Barron’s commented this morning on an unusual letter published by the ARK funds yesterday (I got an email copy, presumably because I’m a former ETF shareholder). The financial newspaper points out out that this is a marketing document, presumably designed to stem redemptions. In it Cathie Wood writes that ARK has “paid the dues associated with higher interest rates” and is now, in her view, in a good position to prosper as rates decline.

What I find odd about the letter: if I understand Ms. Wood’s background correctly, she has spent well over a quarter-century involved in financial markets both as an economist and then as the head of the money management organization she founded ten years ago. How is it that she apparently didn’t appreciate until now that the availability of substitutes is a key determinant of price, in other words, that as interest rates go up stocks tend to go down?

–Nvidia. There’s an article in the Financial Times about the premier AI chip designer. To my mind, the most interesting part is a chart of analyst projections of future earnings. A year ago, the consensus was that the company would earn $1/share in the next fiscal year. The consensus number is now $3. The year-ago guess for fiscal 2029 was $2. Now it’s $6.

Two thoughts: don’t analysts think about operating leverage any more? and how much faith can anyone place in thoughts about what the world will look like five years down the road?

The turn in analyst sentiment, though, (alternatively, the extent to which analysts had blinders on) is amazing.