The surging dollar may have dented the foreign profits of multinational companies and shaved a few percent off of S & P 500 earnings gains. Some of the most prominent companies have already reported that their results were being affected by the dollar’s rising value. Microsoft announced in June that the foreign exchange would impact its fiscal fourth quarter revenues as well as earnings. These earnings will be announced July 26 by the software giant. Both Johnson and Johnson and IBM both stated this week that the strong dollar was affecting their profits. IBM earnings beat expectations but the company lowered its guidance on free cash flow for 2022 from $10 billion to $20 billion, partly due to the greenback. Johnson and Johnson lowered its full-year outlook based upon currency impact. Analysts believe multinationals are the most likely to take a hit due to the dollar’s 12% rally in this year. These include technology companies, consumer staples, and pharmaceutical companies. Julian Emanuel from Evercore ISI, head of quantitative research, equities and derivatives, stated that on average, earnings are hit by 20-30 basis points for every 1% dollar change. He added that 30% of S & P earnings are derived from foreign sources. Emanuel recently cut his 2022 estimate for S & P 500 earnings per share to $221.50, from $226. “When combined with a stronger [dollar]”Margins and EPS are under pressure when possible recession scenarios develop because of labor market strain, supply chains issues, and inventory build-ups in a globalizing world. Brian Rauscher, Fundstrat’s global head of portfolio strategy and asset allocation, stated that a rough estimate of the impact on profits for the second quarter would show a 3% to 5% hit on profits, based on an 14% increase in dollar value year-over-year. He said that the trend will continue into next quarter. “The dollar has been a headwind. Rauscher stated that he doesn’t believe it’s included in the estimates. “Once it is in the estimates we will reflect it, and then it might be no problem.” S & P 500 profits are expected to be up 5.9%, based on estimates and actual reports, according to I/B/E/S data from Refinitiv. As of Wednesday morning, 78.3% reported more than the estimates. Rauscher indicated that only a handful have yet to announce or pre-announce their currency plans. “The dollar was up 16% over the previous year, as we enter the earnings season. Rauscher said that this is not a small amount. He stated that the dollar should be peaking right now because it peaked last year at the end of May and the middle of June. “So peak pain is now in July. This is impacting earnings for the next quarter,” he stated. Rauscher described the threat of the dollar as a “medium-sized” problem for companies. Rauscher said that the dollar threat would be a “medium” problem for companies. No.” “Estimates are way too high. They must be reflected lower. Based on my research, it is not in the pricing yet. He said that once this adjustment is complete, which will take time and run simultaneously with Fed tightening the markets will face formidable headwinds. There will be winners and losers, but not all companies that have overseas sales. Currency exposure is hedged so they won’t take the exact same hit. Strong dollar has many positives, including lower foreign operations costs and other inputs. A strong dollar may prove to be a benefit for retailers because foreign-sourced goods can be purchased in a stronger currency, and then sold to American consumers who pay in dollars. Emanuel said that the market would be more accepting of currency effects from stocks with downward earnings revisions and stocks that have underperformed. Emanuel published a list on July 10 of companies that had been performing well but were flagged by Emanuel for downward earnings revisions. Johnson and Johnson and IBM were on that list. Keurig Dr. Pepper as well as Kimberly Clark are other companies on the list with foreign sales. Both companies will be reporting earnings next week. Rauscher stated that this is a tactical bearish rally and that the market still has work to do on the downside. Earnings are one of the larger components.
The strong dollar could take a bite out of earnings and analysts may not have factored it in
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