Dive Brief:
- Standard & Poor’s 500 companies have kicked off the third-quarter earnings season by flagging the harm to export revenues from a strong dollar, FactSet said, noting that so far 10 out of 20 companies in the index have warned of a setback from foreign exchange volatility.
- S&P 500 companies will report an estimated 2.4% earnings growth in Q3, far less than the 9.9% gain for the quarter predicted on June 30, according to FactSet. The companies, in aggregate, generate two out of every five dollars in revenue overseas.
- Looking ahead, “a sustained strengthening in the U.S. dollar in 2023 could exacerbate the effects of a slowing global economy and high inflation for some U.S. multinationals,” Fitch Ratings said in a report.
Dive Insight:
The dollar, a safe haven amid financial turmoil, has soared in 2022 as markets fell and economic growth slumped in much of the world. Also, the Federal Reserve has rapidly pushed up the benchmark interest rate from a record low, burnishing the appeal of U.S. debt.
The U.S. Dollar Index — which tracks movement of the greenback compared with a basket of six major currencies — has surged 18% this year to the highest level in two decades. Meanwhile, the Japanese yen, euro and British pound have fallen.
A rising dollar hurts U.S. companies that rely on foreign sales by making their products less affordable for overseas buyers. The strong dollar has especially jarred importers in developing countries, the U.N. Conference on Trade and Development (UNCTAD) said last week.
“Some 90 developing countries have seen their currencies weaken against the dollar this year — over a third of them by more than 10%,” UNCTAD said in a report, The countries’ buying power also weakened when prices for energy, grains and other goods soared after the start of Russia’s invasion of Ukraine.
Market volatility and plans by the Fed to further raise the benchmark interest rate may sustain the strong dollar for some time. Policymakers have suggested that they may raise the federal funds rate by as much as 0.75 percentage point at their Nov. 1-2 gathering in the fourth such increase in as many meetings.
Since the start of the third quarter “the trend of U.S. dollar strengthening has accelerated,” NIKE CFO Matthew Friend told analysts on Sept. 29.
Foreign exchange volatility will probably undercut full-year revenue and earnings before interest and taxes (EBIT) by $4 billion and $900 million, respectively, Friend said. NIKE predicts “a wide divergence in constant versus real dollar performance.”
Conagra Brands and McCormick are among other companies that have recently warned about the costs from turbulent currency markets.
“Sectors relying on exports, such as chemicals, or having significant offshore production, such as technology and autos, generate a larger portion of revenue outside of the U.S., increasing their currency exposure and vulnerability to an appreciation of the U.S. dollar,” Fitch said.
“Multinationals in these high-exposure sectors are increasingly citing currency as a headwind to 2022 revenue and/or earnings,” according to Fitch. “Highly rated issuers should be resilient but leveraged entities may be vulnerable, especially if credit trends are already deteriorating.”
