A strong dollar could hit S&P 500 earnings by 10%

Strong has a different meaning when it comes to currencies. It could be good or bad, depending on your country and portfolio.

The U.S. Dollar Index ($DXY) is a measure of the USD against other major currencies. It’s up 19% this year — a big deal for currencies, which typically move in small amounts.

Why is the USD rising so much?

In short: Fed raises rates → U.S. debt looks more attractive → USD rises as money moves into U.S. assets.

1/ Higher interest rates make U.S. debt returns more attractive compared to other countries. Other countries are also raising rates — but not as aggressively as the U.S.

2/ The U.S. economy is strong. Despite its issues, the U.S. is still stronger than other major economies. And when the going gets tough, money moves into safer currencies expected to retain value in uncertain times.

How does a strong dollar impact the world?

As Treasury Secretary Robert Rubin put it, a strong dollar is in America’s best interest. In general, it hurts other countries because:

• U.S. goods become more expensive to foreigners. This hurts when ~40% of the world’s transactions are conducted in USD.
• Commodities (i.e., oil, copper, wheat) — which are nearly all priced in USD — become more expensive for other countries.

Normally, foreign countries benefit by exporting more goods — which become cheaper as the USD rises. But global issues like COVID, climate disasters and the Russian invasion have made it difficult to take advantage.

Investors: Hit to earnings

A strong USD can also hurt U.S. companies — especially those with a large portion of international sales. This week, JPMorgan’s Chief U.S. Equity Strategist warned that companies in the S&P 500 could face a 10% earnings impact from a higher USD.

Here are his thoughts:

• The S&P 500 will reach an “eventual low” in the coming months — bottoming between 3,000-3,400.
• The impact on earnings hasn’t been priced into analyst estimates yet — which could lead to disappointments as companies report.

Companies in the S&P 500 generate ~29% of their sales outside the U.S. But the tech sector is even more exposed — with 59% of its sales outside the U.S. Avoiding international exposure isn’t easy and for many, it’s probably not worth the effort.