Prepare for the US dollar hit of the S&P 500 and strong tech gains

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Indeed, the dollar’s 11% gain this year against a basket of currencies – and 12% against the euro – is a looming problem as earnings season kicks into gear. Standard & Poor’s 500 companies get 29% of their sales from outside the U.S, according to Goldman Sachs. They typically sell those products or services in local currencies, then report financial results including those sales in dollars. So if Nike sells a pair of shoes for 100 euro, it was worth about $7 less at the end of its quarter than at the beginning.

The athletic clothing giant Nike’s shares dropped on June 27 when it revealed that a strong dollar had hurt sales in the most recent quarter and would continue to do so in fiscal 2023. This was an early warning to a market already concerned about the earnings outlook for the June quarter. That came after Microsoft issued a warning that sales for the June quarter would be $460 million lower due to the same reason, reducing profit by $250 million.

Highlights

  • The market’s drop this year has been about investors paying less for each dollar of corporate earnings, says Stacie L. Mintz, head of quantitative equity at PGIM Quantitative Solutions, a unit of Prudential Financial. Currency issues are one of several forces now threatening the earnings themselves. “It’s important because it puts a cloud around earnings season, and this is an important earnings season,” Mintz said. Currency is only one reason projections of earnings growth are dropping across the board. Expected June-quarter profit growth in consumer discretionary companies, for example, has fallen by more than half since March, as the market overall has seen projected growth slip to 5.2% from 6.3%, CFRA Research strategist Sam Stovall said.

  • The numbers aren’t massive in percentage terms – Microsoft’s miss works out to between 1% and 2% of earnings. But in a nervous market where companies’ stocks get punished for even small earnings misses, they are worth being prepared for, experts say.

A couple of companies worth watching as this issue develops are Tesla, which gets a quarter of its sales in developing nations like China, and Apple, which gets 19% of sales in Greater China (including Hong Kong and Taiwan) and another 24% in Europe.

The dollar has risen for the reason it often does during global economic weakness, seen as the world’s reserve currency, and the safest bet in town. Concerns about higher interest rates and the threat to stocks from an economic growth slowdown, if not an outright recession, have also prompted gains in the greenback. The euro has borne the brunt of pressure in currency markets, with recession fears especially high in Europe due to the Russian invasion of Ukraine. Economic sanctions against Russia, including a bar on most Russian sales of natural gas to eurozone nations, have raised the cost of fuel and driven overall inflation to 8.6 percent over the last year.

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