by Companies that will be posting their second quarter earnings in the coming week are expected to mention one common factor eating into their profits; the US dollar. The US currency has climbed to its highest value in 20 years against a basket of other currencies.
A strong dollar
A strengthening greenback can be a headwind for companies in the United States because it reduces the competitiveness of export products abroad. Plus, it also hurts the bottom line of multinationals because they have to convert their foreign profits back into the dollar.
The US dollar measures the value of the currency against a basket of its peers and every percentage point increase year-on means the earnings growth of S&P 500 companies’ drops 0.5%. Market analysts said that the market does not seem to be catching a break. Now that oil prices appear to be easing off, the greenback is strengthening.
Affected companies
Some of the companies that cited the strength of the US dollar as headwind in the past week included Netflix Inc., International Business Machines Corp and Johnson & Johnson. The latter joined Microsoft Corp. in cutting back on its guidance because of the impact of the rise in the US currency.
The results scheduled for the coming week will also see a similar trend, with Microsoft Corp, Apple Inc. and Coca-Cola Co and some other companies scheduled to report their earnings. This will provide a better picture of how businesses are faring in terms of higher inflation and a stronger dollar.
Investors are also shifting their focus on what the US Federal Reserve will have to say next week on these topics at its scheduled monetary policy meeting. It is widely expected that the monetary authority will deliver an interest rate hike of 75 basis points.
Dollar doldrums
According to statistics, of the total revenue of S&P 500 companies, about 40% comes from overseas. 58% of the revenues of the information technology sector come from abroad, which is the highest. The materials sector derives 56% of its revenues internationally, while just 2% of the revenues of the utilities companies’ comes from outside the United States.
According to analysts, the dollar’s strength can weigh down on the earnings when it is combined with supply chain bottlenecks, high inflation and other issues. They said that strength in the USD is coming at a rather bad time because companies are already facing margin pressures and a weakness in demand.
Up until now, there is 5.1% companies part of the S&P 500 that have posted earnings that were better than expectations, which is almost half of the 9.5% average seen in the last four quarters. Moreover, with the US Fed expected to increase the interest rates more aggressively as opposed to other central banks, it is likely that the dollar will not come down soon. It will only add to the currency’s appeal for investors looking for yields. But, if the dollar rally peaks, it could cut back some of the damage that its rise has caused.
