With buck up, profits down for U.S. multinationals
WASHINGTON — The victims vary: fast-food colossus McDonald’s; technology giant Oracle; medical device maker Cooper Cos.
The culprit’s the same: a surging U.S. dollar.
A symbol of American economic might, the rising dollar is denting the earnings of U.S. companies that operate overseas. The damage started showing up in results for the July-September period, and the picture likely will get uglier as companies report earnings for the final three months of 2014.
“It’s clearly a drag on corporate profits,” David Kelly, chief market strategist at J.P. Morgan Funds, said.
A few months ago, analysts had expected a double-digit annual rise in corporate profits in the fourth quarter. Now, in part because the dollar is carving into earnings, they’re forecasting just 4.6 per cent overall earnings growth for companies in the Standard & Poor’s 500 index.
A prolonged drop in profits risks rattling investors and pressuring stocks.
Among major industries, technology companies and producers of energy and raw materials generally derive the highest percentage of revenue from abroad, according to S&P Dow Jones Indices.
Since June 30, the U.S. dollar has jumped 16 per cent against the Japanese yen. Against the euro, it’s up 18 per cent. Against the Brazilian real, nearly 20 per cent.
Investors are buying dollars and driving it higher largely because the American economy is humming while other economies are sputtering. In Europe and Japan, growth has flatlined. In China, it has slowed.
Investors also are seizing on higher interest rates in the United States: the supersafe 10-year U.S. Treasury note yields 1.74 per cent — miserly by historical standards but richer than the 0.46 yield on 10-year German government bonds or the 1.59 per cent on 10-year Spanish bonds.
A higher-valued dollar delivers a double blow to American exporters. It makes U.S. products costlier — and therefore less competitive — in foreign countries. And it means the revenue that U.S. companies collect in, say, euros is worth fewer dollars once they bring the money home. In that way, the strong dollar shrinks profits, too.
Across the S&P 500 index, nearly half of total revenue comes from outside the United States.
American companies are hardly alone in suffering from currency swings. Swiss companies are hurting because their currency, the franc, is much stronger than the euro. Their plight worsened Thursday, when the Swiss central bank abandoned its effort to cap the value of the franc against the euro. The news sent the franc soaring against the euro. The Swiss National Bank abandoned the cap because it had proved too costly, requiring ever-larger purchases of euros.
FIREAPPS, a consulting firm that advises clients on managing currency fluctuations, says 202 North American companies have said currency swings would reduce revenue from July through September — up 53 per cent from the previous quarter.