A few months ago, we discussed what a rising dollar means for investors’ stock portfolios. In that piece, we pointed out that the S&P 500 Index has traded inversely to the currency moves over recent years, and it has become increasingly negatively negatively correlated. One reason, we believe, is that a growing share of revenue and profits for U.S. corporations comes from overseas—and that share seems likely to increase with the globalization of the economy. Although currencies are not the sole driver of equity returns, we think that they are important to monitor, particularly now, given recent central bank actions.
Some multinationals are still feeling the effects of the U.S. dollar strength, and the moves may persist. The most recent warnings are below:
The Procter & Gamble Company:1
“The October‒December 2014 quarter was a challenging one with unprecedented currency devaluations,” said A.G. Lafley, P&G’s chairman, president and CEO. “Virtually every currency in the world devalued versus the U.S. dollar, with the Russian ruble leading the way.” He also said, “The outlook for the year will remain challenging. Foreign exchange (FX) will reduce fiscal 2015 sales by 5% and net earnings by 12%, or at least $1.4 billion after tax.”2
Amy Hood, Microsoft’s CFO, estimated that, “In total, we expect that FX will negatively impact revenue growth by approximately 4 percentage points in Q3.” She also said, “Our guidance is based on our current view of FX rates. Should the U.S. dollar strengthen beyond those assumptions, as it did this quarter, we would see additional negative impact to earnings, revenue, our balance sheet and our contracted-but-not-billed balance.”4
The Impact on Performance
While it can be difficult to quantify the exact revenue and profit impact across the globe from currency moves, we wanted to see if any performance trends might be visible over the past year. The median performance of domestic large-cap dividend payers, grouped by U.S. revenue percentage, shows that the U.S. dollar hurt the performance of global multinational firms trading in the United States over the past year.
Median Performance by Revenue Ranges