Surging dollar may be triple whammy for US earnings

NEW YORK: 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.
The dollar has been on a tear, with an index tracking it against six other major currencies notching roughly an 8 percent gain since the end of June. Few analysts see its breakout performance stalling out anytime soon since the US economy stands on much firmer footing than most others around the world, Europe’s in particular.
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.
Moreover, that weakness, especially in Europe, “is going to be critical here,” he said. “It’s an important component of (US) earnings going forward.”
And 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, Thomson 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.
“If you try and extrapolate out to the fourth quarter and how much that currency effect is going to be, your guidance is probably going to come down for a good slug of the multinationals on the S&P,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.
While the dollar’s strength is a sign of better economic prospects in the US compared with the euro zone and other parts of the world, it makes US goods and services more costly overseas.
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 euro zone’s flagging recovery.
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.
“Not to extrapolate too broadly from one company, but I think the negative sentiment ... has been pretty dramatic,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. Ford shares lost 10.7 percent last week.
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.