The suddenly unstoppable US dollar is posing a triple threat to American companies’ profits: driving up the costs of doing business overseas, suppressing the value of non-US sales and, perhaps most worryingly, signaling weak international demand, Reuters reported.
For companies in the benchmark S&P 500, that’s a big headwind because so many are multinationals, and as a group they derive almost half of their revenue from international markets.
“You will get some companies that have failed to meet expectations based on the weakness we’re seeing overseas, so it is going to be a source of disappointment,” said Carmine Grigoli, chief investment strategist at Mizuho Securities in New York.
While investors and analysts have begun to figure in the negative effects of a fast-strengthening dollar with regard to the approaching third-quarter reporting period, the risk to the fourth quarter and 2015 remains largely unaccounted for.
For instance, third-quarter profit-growth expectations for S&P 500 companies have fallen back to 6.4 percent from about 11 percent two months ago, Reuters data showed.
By contrast, the fourth-quarter growth forecast is down just slightly, to 11.1 percent from a July 1 forecast of 12.0 percent. And profit-growth estimates for 2015 have actually increased in that time from 11.5 percent to 12.4 percent.
While the dollar’s strength is a sign of better economic prospects in the United States compared with the eurozone and other parts of the world, it makes US goods and services more costly overseas.
Data
Data this week showed German factory activity shrank for the first time in 15 months, while European Central Bank President Mario Draghi disappointed stock investors when he failed to provide a specific stimulus program for the eurozone’s flagging recovery. In China, data showed the country’s manufacturing sector is barely growing.
Grigoli said third-quarter profit estimates for US companies with the most overseas sales have fallen more than estimates for the entire S&P 500 and also compared with companies with almost no overseas sales.
Mizuho data shows a 1.5 percentage point decline in estimates from July 31 to Sept. 29 for companies that derive 60 percent or more of their sales from overseas compared with a 1.0 point decline in estimates for the S&P 500 and a 0.4 point decline for companies with almost no overseas sales exposure.
Ford Motor Co.’s disappointing forecast this week may be a hint of what’s to come. The No. 2 US automaker cut its forecasts for pretax profit this year, citing steeper losses in Russia and South America.
The potential hit to earnings follows a nearly flat quarter for the market performance of the S&P 500. The index gained just 0.6 percent, although it remains near its record high.
Equity valuations are also tipped to the high side. From a forward 12-month perspective, the price-to-earnings ratio on the S&P 500 is 15, just above its historic average of 14.9, according to Thomson Reuters data.
