Surging US dollar may be triple whammy for U.S. corporate earnings

What you should know:

1. The US dollar has been on an upsurge:

- An index tracking it against six other major currencies has notched roughly an 8 per cent gain since the end of June.

- On Monday morning, the Bloomberg Dollar Spot Index held at seven weeks of gains, the longest winning streak in four years, after US jobs data out on Friday beat expectations, fueling bets the US central bank will move toward raising interest rates.

- Few analysts see the dollar rally stalling out anytime soon since the U.S. economy stands on much firmer footing than most others around the world, Europe's in particular.

2. The U.S. dollar rally could hit American companies' profits in three ways by:

- Making U.S. goods and services more costly overseas;

- Suppressing the value of non-U.S. sales;

- Perhaps most worryingly, signaling weak international demand.

3. Impact on the US stock market:

- Many companies in the benchmark S&P 500 are multinationals. As a group they derive almost half of their revenue from international markets.

- Third-quarter profit-growth expectations for S&P 500 companies have fallen back to 6.4 per cent from about 11 per cent two months ago, Thomson Reuters data shows.

- But while investors and analysts have begun to figure in the negative effects of a fast-strengthening dollar with regard to the approaching third-quarter reporting period, the risk to the fourth quarter and 2015 remains largely unaccounted for. Thus by contrast, the fourth-quarter growth forecast is down just slightly, to 11.1 per cent from a July 1 forecast of 12.0 per cent.

4. Which sector wil be hardest hit:

- Among sectors, tech has the highest percentage of foreign sales, at 57 per cent, and analysts say it may take the biggest hit from the dollar this earnings season.

Source: Reuters

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