The U.S. economy grew 3.2 percent in the first quarter, and the s&p 500 is up 17.4 percent so far this year
Posted by Emvertex
The dollar index rose 1.3 percent in the first two weeks to 98.3, its highest since the middle of 2017, and some experts worry that continued dollar strength will weigh on s&p earnings and hurt stocks further.
Savita Subramanian, equity and quantitative strategist at bank of America merrill lynch, estimated in an April 29 report that the dollar’s strength this year will reduce the earnings of s&p 500 companies by 2.1 percent, the biggest impact since the fourth quarter of 2015, market watch reported.
Excluding currency, the report also estimated that s&p’s first-quarter revenue rose 8 percent from a year earlier, outpacing the 6 percent increase in the fourth quarter.
Alec Young, head of global market research at FTSE Russell, the world’s second-largest index company, also said a strong dollar was an “absolute headwind” that would make U.S. multinationals more expensive overseas and squeeze profits because of currency shifts.
In recent earnings reports, us multinationals such as Procter & Gamble, united technologies and Coca-Cola have started to cite the impact of a strong dollar on earnings. Coke cited an 11 percent drop in first-quarter earnings due to the rising dollar and estimated that currency headwinds would reduce second-quarter earnings by 7 percent.
For us companies, the threat of a stronger dollar peaked in 2014 and 2015, when the dollar index surged 12.5 per cent and 9.3 per cent, respectively, in one year. The index rose from below 80 to above 100 in two years, with most s&p companies complaining. Thankfully, companies are breathing a sigh of relief after the dollar index fell nearly 10% in 2017. But with the index up more than 4 per cent last year and 1.8 per cent this year, many companies are wary of the near 100 mark.
The main reason for the recent resurgence of the dollar index is that the U.S. economy has outperformed other major economies by a wide margin, particularly the 3.2 percent growth in U.S. GDP in the first quarter, which puts advanced economies like Europe and Japan in a distant second.
However, this year’s dollar rally has taken place in a different time and space from the fed’s mooted rate hikes in 2014 and 2015, which may have been tempered by the fed’s signal that it will not raise rates this year.
Some experts argue that once the dollar index crosses the 100 mark, it is not the s&p 500 that will bear the brunt, but the performance of emerging market stocks with high dollar indebtedness, which will see a large outflow of money from emerging markets, while the us bond market will benefit relatively.
The standard & poor’s 500 index closed at 2,943 on Monday, another record high, up 17.4 percent this year, well above the dollar index’s 1.8 percent gain over the same period, suggesting investors are not worried about the negative effects of a rising dollar.