The rapid retreat of the U.S. dollar index from 20-year highs in the past four months has brought relief to many investors in risky assets and emerging markets. However, there are various signs that the reversal of the epic dollar rally in recent months has not brought much respite to large US multinational companies.
According to FactSet data as of Monday (6th), among the constituents of the S&P 500 Index, more than half of the revenue comes from multinational companies outside the United States. The fourth-quarter profits are expected to decline by 8.7%. That compares with a projected profit decline of just 3 percent for companies with most of their sales in the United States.
U.S. multinationals that sell goods abroad are particularly vulnerable to a surge in the dollar, which can shrink sales in non-U.S. currencies. Although the US dollar has soared sharply in the first three quarters of last year, it has fallen by about 8% from its peak in September. Still, with the U.S. dollar overall still at record highs, up about 7.5% from a year earlier, the pain for many businesses has yet to really ease.
Keith Lerner, co-chief investment officer of Truist Advisory Services, pointed out, “We have just passed the fourth quarter, and the dollar has just begun to weaken, and the full impact has not yet been reflected.” He does not expect the strength of the dollar to last for too long. Monthly USD may fluctuate sideways.
For more than a decade after the 2008 financial crisis, the foreign exchange market has been turbulent. As a result, many multinationals have scaled back their currency hedging operations and stopped buying large amounts of derivatives that protect against currency swings, which caught them off guard when the dollar started to appreciate sharply last year.
Fortunately, US inflation has slowed down since then, prompting some investors to bet that the Fed is approaching the end of the rate hike cycle, drawing a temporary pause to the rise of the US dollar. Since the dollar index peaked in September, the S&P 500 has surged 13% so far.
In terms of business scope, the technology industry is undoubtedly the most exposed to foreign exchange fluctuations. International markets account for 58 percent of S&P 500 technology sales, the largest share among 11 sectors.
Apple’s (AAPL-US) revenue fell last quarter for the first time in nearly four years. The company said that unfavorable currency fluctuations in the quarter posed a challenge to the company’s performance, and that the company’s revenue actually grew when adjusted for currency fluctuations.
Excluding Apple, IBM (IBM-US) posted barely flat sales in the fourth quarter, with a stronger dollar shaving more than $1 billion off revenue. The company expects that in the second half of this year, foreign exchange factors may bring positive performance again.
