Dollar Surge Sets Stage for Earnings Season
As the new year gets underway, the US dollar has experienced a remarkable surge, and its rapid ascent is poised to put corporate earnings to the test. The first companies to report will be the big bank retailers, and analysts are warning that a stronger dollar could lead to a wider dispersion of earnings per share (EPS) revisions.
A Stronger Dollar Means Slower Earnings Growth
Companies that generate most of their revenue overseas, such as consumer goods and household products, are likely to feel the pinch of a strong US dollar. This is because unfavorable foreign exchange conversions will lead to slower earnings growth over time. According to Morgan Stanley analyst Mike Wilson, this phenomenon will drive a wider range of performance outcomes across the index during reporting season, creating a robust stock-picking environment.
Catalysts Behind the Dollar’s Rise
The greenback’s positive price action can be attributed to two main factors: Trump’s election and the subsequent Republican sweep, as well as the recalibration of future Fed easing in the face of strong economic data. Since the election, the US Dollar Index has climbed by over 6%, and it has rallied 10% since hitting a September low.
Earnings Season Expectations
Given the dollar’s recent moves, Wilson expects to see an uptick in mentions of currency impact this earnings season. Trump’s proposed policies, including high tariffs on imported goods and tax cuts for corporations, have contributed to the dollar’s bullish sentiment. Most economists agree that these policies will lead to higher inflation over time, forcing the Fed to keep rates higher for longer.
Looking Ahead
Goldman Sachs research team predicts the dollar will rise by another 5% over the coming year, citing upside risks that are not fully priced in. Morgan Stanley’s Wilson believes earnings momentum looks less strong for consumer goods companies, while the services sector appears more promising. However, it’s possible that multinational companies will report strong earnings based on domestic demand, despite currency impacts.
The Bottom Line
A stronger dollar is typically not a key variable in terms of explaining index EPS growth or performance over time, although it can be an important factor for stocks with high foreign revenue exposure. As earnings season gets underway, investors will be watching closely to see how companies navigate the challenges posed by a surging US dollar.
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