The U.S. Dollar's Boost To Earnings: Stock Market's Next Leg Up
Investing.com | Jun 20, 2017 01:43
by Chaim Siegel of Elazar Advisors, LLC
Many may wonder where the next leg of the bull market could come from. We are in the final days of the second quarter, and most companies will report in July. After a strong Q1, Q2 has the ability to keep the momentum going. With the dollar down since the end of Q1, you have the wind at your back for another boost to earnings. That can give an added catalyst, taking stocks again to new highs.
h3 First Quarter Earnings Were On Fire/h3The S&P 500’s first quarter earnings saw the fastest growth in nearly six years according to Factset . The global economy picked up, helping many companies see better revenues which flowed down to profits.
Guidance on Q1 earnings calls saw the smallest downward revision since 2014. While companies generally tried to be conservative, they had more to be excited about.
h3 Second Quarter Earnings Momentum/h3Given that the global economy likely hasn’t slowed much in Q2, growth in earnings could be close to Q1 again. GDP in the US is expected to accelerate from Q1’s 1.2% to 2.9% in Q2. That can lead global economies higher, further helping multinationals.
As for earnings, S&P 500 reported Q1 earnings growth of 14% yet Q2’s expectaions are for growth to be cut in half, to 6.6%.
Those estimates could be conservative.
h3 /h3 h3 The Weak US Dollar Is Going To Help/h3There are two ways US multinationals benefit when there’s a weak dollar; translation and sales.
Translation
As US multinationals translate earnings from foreign currency to US currency they are going to bring back more foreign currency accounting-wise, which is going to boost results.
In fact, the year-over-year dollar comparison is almost flat, after having been an earnings drag for the last few quarters. That helps year-over-year earnings growth numbers.
The quarter-to-quarter change is also going to be beneficial. That usually helps companies beat guidance that they expected three months ago.
Here’s the chart.
Above you see a few main points. One, the Q2 year-over-year increase in the dollar is less steep than it was in Q1. That helps year-over-year reported numbers look stronger.
Secondly the Q2 level is lower than the Q1 level which means the currency component to company estimates from Q1 are now conservative thanks to a lower dollar.
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Revenue Benefits
The second benefit to multinationals of a weak dollar is more foreign demand. If US goods are cheaper, foreign companies can afford to buy more. That drives sales which drives overall profitability.
h3 /h3 h3 The Largest Companies In The S&P 500 Benefit From A Weaker Dollar/h3Here’s the largest weightings in the S&P 500.
Apple (NASDAQ:AAPL) is 65% of its sales internationally.
Microsoft (NASDAQ:MSFT) is 2.6% of the S&P 500's weighting and gets 75% of its earnings from overseas.
Amazon (NASDAQ:AMZN) is 1.8% of the S&P 500's weighting and has 32% of its sales from overseas.
Johnson & Johnson (NYSE:JNJ) is 1.7% of the S&P 500's weighting and attains about half of its sales from overseas.
Facebook (NASDAQ:FB) is 1.7% of the S&P 500 weighting and also had about half of its sales from overseas.
Those five companies make up over 10% of the S&P 500 and all have meaningful exposure to a weaker dollar.
We could keep going down the list, but without question, a weaker dollar is a boost to companies with multinational exposure. That should help earnings reports which in turn should help the stock market.
Conclusion
Not many have talked about it yet, but the weak dollar is going to help Q2’s earnings season. Q1 earnings were the strongest in almost six years and Q2 estimates could be conservative. If the weak dollar holds where it is, it’s going to make numbers look better. Another solid quarter of earnings could erase some more bearishness, helping stocks again hit new highs.
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