Wall Street Week Coming Strong Dollar Looms During US Earning Season

A Wall Street sign outside the New York Stock Exchange in New York City, New York, US, October 2, 2020. REUTERS/Carlo Allegri

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NEW YORK, July 21 (Reuters) – Companies that report earnings in the coming weeks are likely to cite a common factor in their results: the strength of the 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 earnings into US currency again.

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Analysts at MorganStanley estimated that each percentage point of the annual increase in the US dollar index, which measures the dollar against six other currencies, translates to 0.5 percentage points to reach S&P 500 earnings growth.

“It looks like you can’t get a breather right now. We’re starting to get some relief from oil prices, but the dollar is still beating on you,” said Bill Stone, chief investment officer at Glenview Trust Company.

International Business Machines Corp., Netflix Inc (NFLX.O) and Johnson & Johnson (JNJ.N) were among companies that last week pointed to the dollar’s strength as a headwind, with Johnson & Johnson joining Microsoft Corp (MSFT.O). ) by cutting off the routing due to the effect of the rising dollar.

Next week’s results from Apple Inc (AAPL.O), Microsoft Corp (MSFT.O), Coca-Cola Co (KO.N) and a slew of other companies will give investors a better picture of how companies can continue to hold their own. From a strong dollar and rising inflation.

Investors are also waiting for what the Federal Reserve will say on these issues at next week’s monetary policy meeting, at which it is widely expected to deliver another massive interest rate hike of 75 basis points. Read more

U.S. dollar

Overall, about 40% of S&P 500 revenue comes from abroad, according to data from FactSet. Information technology leads all sectors with 58% of revenue generated internationally, followed by materials with 56%, while utility companies get only 2% of their revenue from the United States, according to FactSet.

Analysts said the dollar’s strength portends a combination of rising inflation, supply chain issues and other factors affecting earnings.

“The dollar’s ​​rate of change shows a strong negative correlation over time against the S&P 500 earnings reviews. The strength of the US dollar comes at an ill time for companies already facing margin pressure and increasingly weaker demand,” Morgan Stanley analysts wrote.

So far, 5.1% of S&P 500 companies that have reported second-quarter results have reported higher-than-expected earnings, nearly half the 9.5% average over the previous four quarters, according to Refintiv data.

Few can tell when the dollar will turn, as the inflation-fighting Federal Reserve is expected to raise interest rates more aggressively than other central banks, boosting the US currency’s attractiveness to yield-seeking investors.

However, some are betting that signs of the peak in the dollar’s rally could offset some of the damage from the dollar’s boom.

John Lynch, chief investment officer, wrote that dollar peaks over the past 40 years were followed by spikes in the S&P 500, with the benchmark index rising 10% on average in the next 12 months due to increased risk appetite and expectations of improving earnings. Comerica Wealth Management.

Jim Poulsen, chief investment analyst at The Leuthold Group, said the dollar is trading at nearly a 120% “safe haven premium” based on its historical relationship to the consumer confidence index.

He added that the dollar has fallen 4.5% on average over a 12-month period every time its premium has risen more than 20% since 1988.

Others look to the silver lining of the dollar’s strength, which some see reflects the belief that the United States can weather a looming global slowdown better than other countries.

Samir Samana, chief global market strategist at Wells Fargo Investment Institute, has been increasing his weight on US stocks, betting that any effects of a strong dollar will be outweighed by better long-term economic growth.

“We think investors are focusing too much on the dollar’s impact on earnings,” he said.

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(David Randall reports). Additional reporting by Sinead Caro. Editing by Ira Yosipashvili and Jonathan Otis

Our Standards: Thomson Reuters Trust Principles.

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