Softer dollar may be stock silver lining amid drama
currency 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 largecap 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 1 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,” he added.
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.
Ed Yardeni, president of consulting firm Yardeni Research Inc, questioned whether the dollar’s fluctuations will significantly increase profits, citing his firm’s analysis showing minimal overall negative impact from the currency’s strength in recent years.
“In theory, it should be a positive,” Yardeni said. ‘‘But as a practical matter looking at the past two years, it didn’t really show up as a major drag on earnings, so I’m not sure it’s going to suddenly be a major boost to earnings as it reverses itself.”
The dollar also remains generally above levels where it was during the second quarter of 2016 even as it has softened this year.
Peter Andersen, Chief Investment Officer with Fiduciary Trust Company in Boston, worries over what the weakened dollar reflects about global attitudes on the US economy’s health.
“I tend to think when the dollar trades off that it’s more of a sentiment reading,” Andersen said. ‘‘So that has more concern to me than the positive byproduct of foreign currency translation giving a boost on earnings.”
US STOCKS: US stocks rose but closed below their session highs on renewed concerns about Donald Trump’s presidency, after two new reports related to a federal investigation into possible coordination between Russia and Trump’s election campaign.
A senior White House adviser is a significant person of interest in the law enforcement investigation of possible Russian ties, the Washington Post reported on Friday, citing people familiar with the matter.
Separately the New York Times reported that Trump told Russian officials at the White House that firing FBI Director James Comey relieved “great pressure” from the ongoing probe.