Brace for the impact of the US dollar on the S&P 500, big tech earnings
A photo taken on November 7, 2017 shows people arriving at the Nike Europe headquarters in Hilversum.
When sportswear giant Nike revealed on June 27 that a strong U.S. dollar weighed on sales in its final quarter and that the rising value of the greenback would continue to pressure sales in the fiscal year 2023, its shares were sold and gave early warning to a market. already concerned about the earnings outlook for the June quarter. This followed a warning from Microsoft that June quarter sales would be $460 million lower for the same reason, which would reduce profits by $250 million.
Indeed, the dollar’s 11% gain this year against a basket of currencies – and 12% against the euro – is a threat problem as earnings season kicks off. According to Goldman Sachs, Standard & Poor’s 500 companies make 29% of their sales outside the United States. They typically sell these products or services in local currencies and then report the financial results, including those sales in dollars. So if Nike sells a pair of shoes for $100, it was worth about $7 less at the end of its quarter than it was at the start.
The numbers aren’t huge in percentage terms – Microsoft’s miss is between 1% and 2% of revenue. But in a jittery market where corporate stocks are punished for even small shortfalls, they are worth being prepared for, experts say.
According to Stacie L. Mintz, head of quantitative equities at PGIM Quantitative Solutions, a unit of Prudential Financial, the market’s decline this year has been due to investors paying less for every dollar in corporate earnings. Currency issues are one of many forces now threatening earnings themselves.
“It’s important because it puts a cloud around earnings season, and it’s an important earnings season,” Mintz said.
Currency is just one reason earnings growth forecasts are falling across the board. Expected June-quarter earnings growth at consumer discretionary companies, for example, fell by more than half since March, as the broader market saw projected growth drop to 5.2% from 6, 3%, said CFRA Research strategist Sam Stovall.
The dollar has risen for the reason it often does during global economic weakness, considered the world’s reserve currency and the safest bet in town. Concerns about higher interest rates and the threat to equities of slowing economic growth, or even an outright recession, also drove the greenback’s gains.
The euro bore the brunt of the pressure in currency markets, with recession fears particularly high in Europe due to Russia’s invasion of Ukraine. Economic sanctions against Russia, including a ban on most Russian sales of natural gas to eurozone countries, have raised the cost of fuel and pushed headline inflation to 8.6% over the past year. last year.
Technological benefits and the dollar
The extent of pressure on earnings from currency fluctuations will vary from company to company and sector to sector, depending on the composition of their business.
In general, stocks of companies that do most of their selling domestically have outperformed more global companies in 2022 by around 9 percentage points, according to a June 22 report by Goldman Sachs strategist David Kostin. US-centric companies fell an average of 15%, with companies with higher percentages of overseas sales dropping 24%.
With 59% of sales, technology companies are the most exposed, according to Goldman. This is especially true for semiconductor companies, but also affects consumer stocks like Apple and advertising-focused names like Meta Platforms and Alphabet, parent companies of Facebook and Google, respectively. Materials companies in sectors such as paper and chemicals are second at 50%, with health care, financial stocks and utilities having the lowest exposure among the 11 sectors in the large index benchmark. market capitalizations.
Companies with high exposure to overseas sales include Qualcomm (96%), oil services firm Schlumberger (85%), disability insurer Aflac (70%), Netflix and Meta (59%) and Alphabet at 54%. .
Companies with high exposure to Europe are likely to make the largest currency adjustments to their earnings. These include Booking Holdings at 79%, Philip Morris International at 39% and aerospace supplier Hexcel at 44%.
None of these companies have recently reported a decline in revenue or earnings due to the currency.
Tesla, Apple and foreign currencies
A few companies worth watching as this problem grows are Tesla, which makes a quarter of its sales in developing countries like China, and Apple, which makes 19% of sales in Greater China (including Hong Kong and Taiwan) and another 24% in Europe.
The biggest impact on Tesla, in particular, will come from China’s zero Covid policy, which shuttered Tesla’s factory in Shanghai for much of the quarter, Wedbush analyst Dan Ives said. At Apple, the impact will be greater in hardware than in the services sector, and will be mitigated by Chinese government interventions to keep the yuan close to stability against the dollar, said CFRA Research analyst Angelo Zino. .
“It’s going to be a [2 percent] at [3 percent] headwind to revenue from major tech players and could accelerate in the second half,” said Wedbush analyst Dan Ives.
The biggest impact for Apple could come in the September quarter, as the dollar has continued to rise since late June, Zino said.
“Given an environment where consumer spending could weaken, this could affect how Apple prices products in different parts of the world,” Zino said.
The good news: businesses have ways to combat currency fluctuations, and they tend to be short-lived.
At Nike, federal filings indicate that currency hedging helped improve gross profit margins, recover some lost revenue, and price increases also helped contain the damage.
Some companies, especially chipmakers, can offset their losses by selling in local currencies by manufacturing overseas, especially in Asia. This allows them to recoup some of the lost revenue in the form of lower production costs.
One thing that’s not likely to happen is for U.S. companies to move their operations back to the U.S. to manage currency risk, said CFRA analyst Zachary Warring, who covers Nike. Such measures take too long to be effective against volatile currency fluctuations, he said, although it could be one of a list of reasons highlighted by the Covid pandemic for global companies are reducing their dependence on Asia.
“You wouldn’t open factories because of a one-year swing in some currencies,” he said. “The movement has been so rapid and so extreme that it is difficult for companies to react.”
For investors, the smart plan is to be aware of how currency risk might affect the companies where they hold stock, Mintz said. To help them do this, finance leaders need to communicate these risks early and clearly, she added.
“The more information investors have, the better decisions they can make,” Mintz said. “Do you on the side of sharing.”