The quickly appreciating U.S. dollar could begin to weigh on corporate earnings, especially among large-cap S&P 500 stocks and related exchange traded funds with significant overseas exposure.
The SPDR S&P 500 ETF (NYSEArca: SPY), which tries to reflect the performance of the S&P 500 index, has increased 11.5% over the past year but is down 1.9% year-to-date.
The stronger USD is expected to diminish profits for large companies that do business overseas, and some strategists contend that the strengthening currency and low energy prices could constrain quarterly S&P 500 earnings growth to just 3%, compared to previous calls for a 7% rise at the start of October, reports Eric Platt for Financial Times.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) has increased 13.1% over the past year and rose 2.6% year-to-date. [King Dollar ETFs are Quite Royal in January]
The appreciating greenback, which has been rallying against a basket of foreign currencies since July, could pressure the S&P 500 where foreign sales make up over two-fifths of total turnover, with 261 companies in the index generating over 15% of revenues overseas.
Deutsche Bank calculates that for every 10% increase in the USD against major currency baskets, the S&P 500 earnings face a potential decline of “slightly over $2,” or each 10 cent drop in the euro from about $1.2 could cut $1 from S&P 500 earnings.
“The uncertainty in commodities, foreign exchange and interest rates across the curve is high, confounded by uncertainty in quantifying their influence on earnings per share and price-earnings,” David Bianco, strategist at Deutsche, said in the FT article. “We expect more cuts during fourth-quarter earnings season, especially for those with FX exposure.”
For instance, GameStop (NY:SE GME) has already blamed the “strength of the US dollar” for part of its slide in holiday same-store sales.