Strong dollar looms over US earnings season

US currency stands near 20-year high against basket of its peers

NEW YORK:

Companies reporting earnings in coming weeks are likely to mention one common factor gouging their results: the strong dollar.

The US currency stands near a 20-year high against a basket of its peers.

A strong dollar can be a headwind for US companies as it makes exporters’ products less competitive abroad and hurts multinationals that need to convert their foreign profits back into the US currency.

Each percentage point of year-on-year increase in the US dollar index, which measures the dollar against six other currencies, translates into a 0.5-percentage-point hit to the S&P 500 earnings growth, analysts at Morgan Stanley estimated.

“You seemingly can’t get a break right now. We’re starting to get some relief from oil prices, but you’ve still got the dollar banging on you,” said Glenview Trust Company Chief Investment Officer Bill Stone.

International Business Machines Corp, Netflix Inc and Johnson and Johnson were among the companies that in the past week cited the dollar’s strength as a headwind, with Johnson and Johnson joining Microsoft Corp by cutting its guidance due to the impact of the greenback’s rise.

Next week’s results from Apple Inc, Microsoft Corp, Coca-Cola Co and a slew of other companies will give investors a better picture of how businesses are holding up in the face of the strong dollar and soaring inflation.

Investors are also awaiting what the Fed will have to say on those topics at its monetary policy meeting next week, at which it is widely expected to deliver another jumbo-sized 75-basis-point rate increase.

Overall, some 40% of S&P 500 revenues come from overseas, data from FactSet showed. Information technology leads all sectors with 58% of revenues derived internationally, followed by materials with 56%, while utilities’ companies source just 2% of their revenues out of the United States, according to FactSet. The dollar’s strength threatens to combine with high inflation, supply chain issues and other factors to weigh on earnings, analysts said.

“The rate of change on the dollar exhibits a strong negative correlation over time vs S&P 500 earnings revisions. US dollar strength comes at an inopportune time for corporates already facing margin pressure and weaker demand,” Morgan Stanley’s analysts wrote.

Published in The Express Tribune, July 24^th, 2022.

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