The Looming Shadow of the Strong Dollar: How Global Headwinds Threaten US Corporate Earnings
The US stock market’s remarkable performance in recent years has fueled a narrative of "US exceptionalism," suggesting an inherent superiority in American businesses. However, this narrative overlooks a crucial factor: the interconnectedness of the global economy. As the fourth-quarter earnings season commences, a sobering reality confronts corporate America: even the most successful US firms are not immune to the challenges of a global marketplace. A confluence of factors, including weakening international economies, subdued global demand, and a surging US dollar, is poised to erode corporate profitability, challenging the notion of US economic invincibility.
The strengthening dollar, a consequence of robust US growth and persistent inflation, poses a significant threat to US multinationals. Over 41% of S&P 500 companies’ revenues originate from abroad, the highest proportion since 2013 and nearing the all-time high. This exposure creates a double-edged sword. Firstly, sluggish economic growth in major trading partners like China, Canada, and Europe is likely to dampen demand for US goods and services. Secondly, revenues earned overseas translate into fewer dollars as the greenback appreciates, directly impacting bottom-line figures.
The dollar’s ascent has been dramatic, gaining 10% since late September and 7% year-over-year. It currently stands at a two-year high against a basket of G10 currencies and has reached multi-year peaks against the British pound and Canadian dollar. With US economic resilience and stubbornly high inflation bolstering Treasury yields, investors are re-evaluating their Federal Reserve rate cut expectations for 2025. Some analysts, like those at Bank of America, no longer anticipate any rate reductions this year, while others speculate that the Fed’s next move might even be a hike. This "stronger for longer" dollar outlook, as Goldman Sachs describes it, further complicates the earnings picture for US corporations.
While economic theory suggests that a 10% year-over-year dollar appreciation should shave roughly 3% off S&P 500 earnings, current estimates project 9.5% earnings per share growth for the fourth quarter and 14% for the full year 2025. However, revenue growth is estimated at a more modest 4.1%, partly attributable to the dollar’s strength. Historically, positive revenue surprises decline during periods of dollar appreciation, suggesting that fewer companies will likely exceed consensus sales forecasts this quarter compared to the previous period’s 42%. The impact of the strong dollar will undoubtedly be a recurring theme in upcoming earnings calls.
Despite the pervasive concern, the dollar’s impact on US earnings may be more nuanced than universally damaging. Morgan Stanley analyst Mike Wilson argues that the effect could be more "idiosyncratic" than widespread. He points out that companies with limited foreign sales exposure (less than 15% of revenues) and low sensitivity to dollar fluctuations have recently outperformed. These companies experience "minimal" impact from exchange rate shifts. Examples include United Healthcare, T-Mobile, and Home Depot, contrasting with companies like PepsiCo, IBM, and Oracle, which derive a larger portion of their revenues from overseas.
The current dollar strength, while posing a challenge, does not yet represent a critical threat to corporate America’s competitiveness and profitability. However, if this trend persists, this earnings season could offer a glimpse into a more challenging future. The interplay between global economic forces and currency fluctuations will remain a pivotal factor in shaping the fortunes of US corporations, emphasizing that even in an era of perceived US exceptionalism, the global economy remains inextricably linked. The ability of companies to navigate these complexities will ultimately determine their success in the months and years ahead.
