Weaker dol­lar may be sil­ver lin­ing for US stocks

New Straits Times - - Business -

NEW YORK: With Stan­dard & Poor’s (S&P) 500 In­dex com­pa­nies set to notch their strong­est quar­terly earn­ings growth in about six years, a weaker United States dol­lar may help keep the profit mo­men­tum rolling and sup­port share prices in the weeks to come.

Af­ter a dra­matic week in Wash­ing­ton that rat­tled fi­nan­cial mar­kets, one pos­si­ble sil­ver lin­ing for stock in­vestors was the weaker dol­lar, which can sup­port earn­ings of US multi­na­tional com­pa­nies with large for­eign op­er­a­tions.

The dol­lar weak­ened 0.5 per cent against a bas­ket of cur­ren­cies on Wed­nes­day fol­low­ing re­ports that US Pres­i­dent Don­ald Trump tried to in­ter­fere with an in­ves­ti­ga­tion into his for­mer na­tional se­cu­rity ad­viser’s ties with Rus­sia, rev­e­la­tions that also sparked the S&P 500’s big­gest one-day drop in eight months.

The cur­rency was on track for its big­gest weekly per­cent­age drop in a year, and so far this year the dol­lar has pulled back five per cent, hav­ing erased its post-US elec­tion gains.

Move­ments in the dol­lar can be sig­nif­i­cant for US-based multi­na­tional com­pa­nies.

The stronger the green­back is against other cur­ren­cies, the less valu­able for­eign sales be­come when they are trans­lated back into the US dol­lar for re­port­ing pur­poses.

“A weaker dol­lar is ar­guably good for any com­pany that sells over­seas,” said Alan Gayle, di­rec­tor of as­set al­lo­ca­tion at RidgeWorth In­vest­ments in Atlanta.

“If you’re talk­ing about a sil­ver lin­ing, if you are a large-cap com­pany that has sig­nif­i­cant over­seas sales ex­po­sure, then this is an emerg­ing pos­i­tive.”

First-quar­ter re­sults from US com­pa­nies have bol­stered con­fi­dence in eq­ui­ties, with the mar­ket reach­ing record highs ear­lier this month even as events in Wash­ing­ton threat­ened Trump’s prom­ises of tax cuts, in­fra­struc­ture spend­ing and re­duced reg­u­la­tion that had helped fuel a rally in stocks.

With more than 90 per cent of the S&P 500 hav­ing re­ported, first-quar­ter prof­its are on pace to rise by 15.2 per cent, ac­cord­ing to Thom­son Reuters I/B/E/S.

Sec­ond-quar­ter earn­ings are ex­pected to rise by 8.5 per cent, a fig­ure that could swell de­pend­ing on cur­rency moves. The dol­lar has fallen 3.2 per cent dur­ing the sec­ond quar­ter alone.

Com­pa­nies with sig­nif­i­cant global op­er­a­tions have al­ready showed strength as the dol­lar has weak­ened in the first quar­ter.

S&P 500 com­pa­nies with more than half their rev­enue from out­side the United States have re­ported a 13.2 per cent in­crease in earn­ings, when ex­clud­ing the en­ergy sec­tor. That com­pares with a 10.6 per cent in­crease for com­pa­nies with half or more of rev­enues com­ing do­mes­ti­cally.

En­ergy sec­tor re­sults are skew­ing over­all S&P 500 earn­ings be­cause of year-ago neg­a­tive re­sults.

The S&P 500 has climbed 6.5 per cent this year while the Rus­sell 2000, the bench­mark for small-cap stocks that tend to be more do­mes­ti­cally fo­cused, has climbed only one per cent.

The weaker dol­lar “could be a pretty strong tail­wind,” said David Schiegoleit, man­ag­ing di­rec­tor of in­vest­ments at US Bank Pri­vate Client Re­serve.

“The com­pa­nies that garner most of their rev­enue from over­seas sources, that could be a mo­men­tum play if you con­tinue to see a soft dol­lar.”

Ac­cord­ing to cur­rency risk con­sult­ing firm FiREapps, which tracks cor­po­rate com­men­tary on cur­rency ef­fects, the im­pact of cur­rency moves on US com­pa­nies in the first quar­ter has been sim­i­lar to that in the prior two quar­ters.

But the firm cau­tioned that the first quar­ter is his­tor­i­cally a pe­riod with re­duced cur­rency im­pact, and noted the weaker dol­lar has cre­ated po­ten­tial for an in­crease in in­ter­na­tional earn­ings. Reuters

Newspapers in English

Newspapers from Malaysia

© PressReader. All rights reserved.