As we head toward the third quarter and the start of the earnings season, a strengthening U.S. dollar could weigh on S&P 500 and large-cap exchange traded funds that have exposure to multi-national companies with a global footprint.
Year-to-date, the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO) have declined 1.1%.
As we look to the second half of the year, investors should be concerned about the impact of a stronger U.S. dollar and of lower global economic growth on the sales and earnings for S&P 500 companies.
“Based on estimates as of today, are companies in the S&P 500 with more global exposure expected to report weaker sales and earnings growth relative to companies in the index with less global exposure for the quarter? The answer is yes,” John Butters, Senior Earnings Analyst for FactSet, said.
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According to FactSet data, estimated earnings decline for the S&P 500 for Q2 2016 is -5.2%. Companies that generate more than 50% sales inside the U.S. are estimated to experience an earnings decline of only -2.8%. In contrast, companies that generate less than 50% of sales in the U.S. are expected to experience an earnings decline of -9.9%.
Looking at estimated sales, S&P 500 for Q2 2016 is estimated to see a sales drop of -0.8%. Companies that target domestic markets will see positive sales growth of 2.5%, whereas companies with a larger foreign market could expect sales to decline -9.0%.
[related_stories]“S&P 500 companies with higher global exposure are expected to report lower earnings growth and lower revenue growth relative to S&P 500 companies with lower global exposure for the second quarter,” Butters said.
Alternatively, investors may focus on mid- and small-cap companies that have less exposure to currency risks as they target domestic markets.
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For instance, the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH) and SPDR S&P MidCap 400 ETF (NYSEArca: MDY) both track the S&P MidCap 400 Index, and the Vanguard Mid-Cap ETF (NYSEArca: VO) provides an alternative as it follows the CRSP US Mid Cap Index.
Additionally, investors can also look at small-cap ETFs, including the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which follows the S&P SmallCap 600 Index, the Vanguard Small Cap ETF (NYSEArca: VB), which tracks the CRSP US Small Cap Index, and iShares Russell 2000 ETF (NYSEArca: IWM), which reflects the benchmark Russell 2000 Index.
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