While it’s still early, the warnings about currency risk, notably a stronger greenback, indicates multinational firms could face an increasingly tough period ahead. S&P 500 companies previously generated one of their strongest quarterly earnings, partly due to a depreciating U.S. dollar – the weaker dollar benefits large-cap U.S. multinationals by making exports cheaper to foreign buyers and also causing overseas profits to look bigger when converted back into USD.
U.S. small-cap stocks have also enjoyed a strong performance relative to other global equities, especially with the U.S. dollar strengthening against foreign currencies. Small-cap financials typically generate significant portions of their revenue on a domestic basis.
“Although in small caps, financials have delivered 50 basis points more of return than health care from each 1% of GDP growth on average, the financial small cap premium is by far the most sensitive to GDP growth. For every 1% of GDP growth on average, small cap financials have returned 2.4% more than large cap financials,” notes S&P Dow Jones.
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