With Janet Yellen set to lead the Federal Reserve and a debt-ceiling compromise emerging, investors may soon be able to turn their attention back to a much easier-to-decipher storyline: earnings.

U.S. economic growth remains sluggish and now faces fiscal headwinds, but a rebounding Europe and few foreign-exchange obstacles could help make multinationals a bright spot this earnings season.

While analysts continue to whittle down their projections for pure-domestic plays, the earnings revision ratio on the top 20% S&P 500 companies that rely on overseas revenue recently hit 16-month highs, according to Bank of America Merrill Lynch (BAC).

“We expect this trend will continue, and believe we could see more multinationals beat this quarter, particularly given trends out of Europe,” Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Merrill, wrote in a note this week.

Nike (NKE), which relies on non-North American markets for 59% of its sales, supported this thesis when it scored a big earnings beat late last month.

The first Dow member to report results revealed an 8% jump in revenue to $6.97 billion, thanks in part to strength from overseas markets. Nike’s sales rose 8% in Western Europe, 10% in Central and Eastern Europe and 5% in emerging markets.

Europe Emerges From Hibernation

Kristina Hooper, U.S. investment strategist at Allianz Global Investors, said it makes sense to expect multinationals to outperform this earnings season given that many of these companies were held back by Europe’s previous struggles.

“We’re seeing a positive environment for global growth. We anticipate that will filter into earnings in the near term,” said Hooper. 

Optimism about Europe is being fueled by a number of gauges that suggest the continent has finally broken out of its post-debt-crisis slump.

The Organisation for Economic Co-operation and Development’s leading composite index for Europe has climbed during each of the past 11 months through August, which enjoyed the strongest reading for this metric since July 2011. The strength has been led by some of the continent’s previously weakest points, including Spain, Ireland, Greece and Portugal.

“Europe’s economic indicators since the summer mostly have signaled that the region’s economy has bottomed,” Ed Yardeni, president of investment advisory Yardeni Research, wrote in a recent note.

That evidence has allowed analysts to ratchet up earnings estimates on companies that have exposure to Europe.

“Europe was pretty beaten down there for a while. Everyone was pretty negative on it,” said Greg Harrison, senior research analyst at Thomson Reuters (TRI).

Ramping up EPS Projections

The less bearish sentiment about Europe is being felt more broadly by internationally-focused companies.

BofA Merrill’s earnings revision ratio for the top 20% of S&P 500 companies by overseas sales has been increasing since last August and now stands at 0.8 -- its highest level in 16 months.

The ERR measures the number of stocks for which consensus EPS estimates have increased versus the number for which they have fallen.

While optimism mounts about multinationals, analysts are more concerned about U.S.-centric stocks. The bank’s ERR on pure domestic plays has retreated each of the past four months to 1.0.

Sectors that have greater exposure to international markets are also enjoying a sentiment shift.

BofA Merrill said its ERR on materials and industrials posted the biggest increases in September, with industrials sporting more positive than negative revisions for the first time since June 2012.

According to S&P Capital IQ, analysts anticipate S&P 500 industrial stocks to grow third-quarter earnings 6.08%, the third-highest out of the index’s 10 sectors. Consumer discretionary stocks, some of which have strong international exposure, are expected to generate a 10.6% jump in earnings.

“Amid the recovery in Europe and a reacceleration in global growth, analysts have been growing less negative on the most foreign-exposed stocks,” Subramanian wrote.

Winning on the Top Line

Earlier this week, Alcoa (AA), which gets 48% of its revenue overseas, kicked off earnings season with a nine-cent EPS beat, the aluminum maker’s biggest beat since the first quarter of 2012, according to Capital IQ.

The Pittsburgh-based former member of the Dow Industrials maintained its call for global aluminum demand of 7% in 2013 and actually boosted its forecast for heavy truck and trailer market growth.

Subramanian notes that multinationals are also benefiting from the foreign-exchange market as the U.S. dollar is flat to down year-over-year against most major currencies, excluding Japan’s yen. The weaker greenback should help exports for companies that rely on overseas markets for a chunk of their sales.

While the U.S. government shutdown won’t have an impact on third-quarter earnings, a prolonged impasse could benefit multinational stocks that are more insulated from any domestic economic impact.  

According to Thomson Reuters, there are more than a dozen S&P 500 companies that rely on the U.S. for less than 20% of annual revenue, including silicon behemoth Intel (INTC), bottler Coca-Cola Enterprises (CCE), international tobacco giant Philip Morris (PM), chip maker Qualcomm (QCOM) and Cadbury owner Mondelez International (MDLZ).

“The companies that have access to areas such as Europe are going to win on the top line this quarter,” said Christine Short, senior manager of corporate earnings at S&P Capital IQ.

Follow Matt Egan on Twitter @MattMEgan5