Fourth-quarter earnings season is almost over. And one common theme has emerged…

Apple Inc. (Nasdaq: AAPL) just warned about the impact of the coronavirus, stemming from both Chinese demand and trouble sourcing parts to make iPhones.

In fact, according to a report from CNBC, nearly 20% of S&P 500 Index companies have had similar warnings.

That’s not surprising. Following the virus outbreak, China effectively shut down the country.

Its $14 trillion economy is the world’s second largest and is firmly entrenched in global supply chains.

And S&P 500 companies generate 43% of their revenue from international markets. So, while these companies are U.S.-based, they are truly global in nature.

But despite this, there are still opportunities in international markets … even in China, as my colleague Ted Bauman wrote here.

But if the coronavirus has you worried about international exposure in your portfolio, then look no further than these overlooked U.S. stocks…

A Direct Line to the Booming U.S. Economy

Small-cap stocks generate about 80% of sales from the U.S. So, there is much less risk of disruption from slowing international growth or China-specific issues.

That also means small caps are well-positioned to leverage strength in the U.S. economy.

Consider that:

  • Regional manufacturing reports are perking up across the country.
  • The most recent employment report delivered a positive surprise, with the U.S. adding 225,000 jobs. The unemployment rate remains near a 50-year low.
  • President Trump is hinting at another round of tax cuts … yet more stimulus for domestic companies to turn into profits.

And just in case the U.S. growth outlook slips, Fed Chairman Jerome Powell just told Congress that the central bank is on standby to cut rates if necessary.

Here’s something else to note about small caps: Earnings are expected to jump higher in 2020, which is driving small-cap forward valuations to levels that are below large-cap stocks (shown below).

So, while investors are concerned with large-cap valuation levels, small-cap valuations are at the lowest level of the past 10 years.

Next week, I’ll tell you about the one sector driving a large portion of this earnings growth. Be sure to check in.

But for now, you can insulate your portfolio from the impact of the coronavirus and focus on domestic small-cap stocks that stand to benefit most from a strong U.S economy. And that’s why I recommend shares in the Vanguard S&P Small-Cap 600 exchange-traded fund (NYSE: VIOO).

Best regards,

Clint Lee

Research Analyst, The Bauman Letter