US dollar enters center stage for earnings
NEW YORK (Reuters) – The dollar has moved from a supporting role to a featured player this earnings season, a boon to US multinationals that have benefited from the biggest quarterly year-on-year decline in the greenback in three years.
Since the start of October, at least 35 US companies have cited currency “benefits” or “tailwinds” and “weaker dollar” for boosting quarterly earnings, compared with few mentions a year ago, and some see that extending to the fourth quarter, a Reuters analysis shows.
“The quarter was one where the dollar weakened over the course of the quarter, more so than analysts expected,” said Jill Carey Hall, an equity and quantitative strategist at Bank of America Merrill Lynch in New York.
“That’s what’s, in part, been helping multinationals,” she said. “They have seen some of the strongest results so far.”
The US dollar index’s average in the third quarter fell from its yearago level by about 2.5%, the weakest showing since 2014, Thomson Reuters data shows.
The index has recovered from its recent lows but remains down about 7% for the year.
US-based multinational companies can benefit the most from declines in the dollar, which make overseas sales more valuable when translated back into the US currency.
Among companies citing a positive dollar impact were Alphabet Inc., International Business Machines Corp. and other names in technology, which has the highest percentage of foreign sales within the S&P 500.
Others included Axalta Coating Systems Ltd., W.R. Grace, Coca Cola Co. and Xerox Corp., which said the third quarter was the first in 13 that a weaker dollar boosted the company’s earnings, by about 1 percentage point.
“And we’re expecting that to improve into Q4 based upon quarter-end rates,” Xerox chief financial officer William Osbourn said in the company’s October 26 conference call after it reported higher-than-expected results.
The weaker dollar “should help with the discounting pressure from the non-US manufacturers, so that’s a good sign,” Harley-Davidson chief executive Matthew Levatich told investors on October 17.
The dollar’s weakness has helped offset the impact of a trio of hurricanes that took a heavy toll on companies in the third quarter. If the benefit continues, it could help companies hit the 11.7% profit gains analysts have projected for the fourth quarter.
With results in from more than three-quarters of the S&P 500 companies, third-quarter profit growth is estimated at 8.0%, up from 4.3% three weeks ago, Thomson Reuters data shows.
Much of the improvement has come with stronger-than-expected technology results. Ninety percent of companies in the S&P technology index are beating earnings expectations, while 72% are surpassing estimates in the overall S&P 500, the data shows.
Materials companies’ earnings, which have benefited from higher commodity prices tied to the weaker dollar, have had a high percentage of beats as well.
Adding to the weaker dollar’s benefit has been better global economic strength, and that is also why multinational companies have performed better than others this earnings season, Carey Hall said.
S&P 500 companies with 50% or more of sales coming from outside the United States have estimated profit growth of 16.7% for the third quarter, compared with 5.5% for companies with less than 50% of non-US sales, Thomson Reuters data shows.
Stocks of big multinationals also have outperformed, with the Dow Jones index of global titans up about 3.3% since October 1. The small-cap Russell 2000 index is up just 0.2% since then.
“It’s not so much the dollar is a windfall for them; it’s no longer a headwind,” said David Katz, the chief investment officer at Matrix Asset Advisors in New York. “So that’s positive, and outlooks for companies have been generally upbeat.”