Strong Dollar Creates Earnings Headwinds for U.S. Multinationals

The U.S dollar continues its steady march higher, up 14.7% during the past 12 months. 

That sharp rise, coupled with the euro’s ongoing slide, created a scenario we haven’t seen since 2002: parity—a one-to-one exchange rate where €1 = $1. What’s more, that development comes on the heels of the dollar recently hitting a twenty-year high against the Japanese yen.

Many factors are driving these currency dynamics, of course—from the Russia-Ukraine war and concerns of a recession in Europe to various central banks tackling inflation at different speeds to strong demand for “safe haven” dollars in the wake of economic uncertainty.

This trend might be a welcome one if you’re looking for a cheap European vacation this summer. But as the second-quarter earnings season kicks into high gear, it’s causing headaches for U.S. companies that derive a big percentage of their revenues from foreign markets. When the dollar rises relative to other currencies, U.S. multinational companies’ earnings from overseas are worth less when they get converted from foreign currencies into dollars.

The result: Don’t be surprised to see lower profits and disappointed investors—particularly among sectors with the highest exposure to foreign currencies.

Those include:

 

At Horizon, we have taken steps to both pursue the potential opportunities of a rising dollar as well as mitigate the risk of that scenario–including overweighting domestic equities (as a strong dollar is currently acting as a drag on foreign investments) and underweighting emerging markets and the technology sector.


1 S&P GICS Level 1 Sectors, represented by S5INFT (IT); S5MATR (Materials); S5HLTH (HC); S5INDU (Industrials); S5CONS (Staples)

This commentary is written by Horizon Investments’ asset management team.

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