Over the past two years, investors have come to think of U.S. and Europe in a similar light. Each area represents 25% of global GDP, each is getting a major dose of stimulus from central bankers to kick their economies into gear, and the major stock markets in the U.S. and Europe have all moved in lock-step. Indeed the Vanguard FTSE European ETF (NYSE:VGK) has shown a remarkable correlation with the S&P 500.

But that correlation is breaking down. In recent months, European stocks have begun to slump and further downside may lie ahead. Use this opportunity to take a deep look at your European exposure—before it’s too late.

Unless you own shares of a major European company, or a Europe-focused mutual find or ETF, you may not think you have much exposure to Europe. But think again. Many companies in the S&P 500 derive a decent chunk of sales and profits from their European operations. And for some companies, the exposure is considerable.

You’ll find a high level of European exposure in four sectors in particular: technology, industrials, consumer staples and materials producers.

Sounding the alarm bells around Europe may seem familiar. Just a few weeks ago, I noted that France and Italy http://www.streetauthority.com/international-investing/your-portfolio-ex... were becoming regional trouble spots. Now, Germany has joined the fray, with news that its economy contracted 0.2% (sequentially) in the second quarter. The impact of a slowdown in Germany, Italy and France—simultaneously—can’t be overstated. Those three countries account for roughly half of the $17.5 trillion in annual economic activity in the European Union, according to the International Monetary Fund.

Making matters worse, an economic slowdown is leading key companies in Europe to cut prices in order to maintain sales, which is raising the specter of deflation. Inflation is still positive, at around 0.5%, but would ideally be more robust.

The European Central Bank (ECB) has been providing massive stimulus, in large part, because the continent is so heavily in debt. The ECB knows that falling prices can trigger a massive strain on debt servicing abilities, as we saw in Japan in the 1990’s.

I first looked at this issue back in 2011, profiling a range of small and mid-sized firms with hefty European exposure. Meanwhile, larger companies have been seeking ways to trim their exposure to Europe. Back in 2012, GE’s (NYSE:GE) CEO Jeff Immelt told the Wall Street Journal that Europe is "going to be a smaller part of the company going forward, and if things get worse, we will be ready for that as well." GE’s exposure to Europe is now down to 20% of sales, from more than 40% before the 2008 financial crisis.

Even a smaller European footprint doesn’t mean such companies are out of the woods. Take Ford Motor (NYSE:F) as an example. Europe historically accounted for 25% to 30% of Ford’s annual sales but the extended economic slump in Europe has pushed that figure closer to 20%. That led to operating losses of more than $1.5 billion in both 2012 and 2013 and even after massive subsequent cost cuts, Ford is still expected to lose more than $350 million in Europe this year. A fresh economic slump may even render that target too optimistic.

Ford and GE may have trimmed their exposure to Europe in recent years, but a number of other mid and large cap companies have yet to do so. Here’s a look at 12 other companies that derive at least 25% of sales from Europe.

Risks to Consider: As an upside risk, an improving economic environment in the U.S. and emerging markets could help boost demand for European goods and services.

Action to Take --> The next six months will be crucial for Europe. Economic stabilization is essential if the major European economies can avoid even tougher days ahead. A shift into recession would like spook global markets as the European debt crisis moves back into the headlines. This is a good time to identify the level of European exposure for each of the U.S. firms that you own, which can typically be found in a company’s 10-K SEC filings.

Now might be a good time to pivot away from Europe, but that doesn't mean you should give up on all international stocks. Did you know that 79% of the world's highest-yielding stocks are actually overseas? In fact, we've found 93 stocks that yield 12% or more, including some of the safest, highest-yielding stocks the world has to offer. To learn more about the best international investments, click here.


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