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Stocks  | October 22, 2019

As the Q3 2019 corporate earnings reporting season goes into full swing for the S&P 500 companies, a rising U.S. dollar is creating yet another headwind for profits along with increased costs and faltering demand in the midst of the U.S.-China trade war and a global economic slowdown. The WSJ Dollar Index, which compares the value of the dollar to a basket of 16 other currencies, reached its highest level since 2017 in September, up by nearly 1% so far in 2019 after rising by 4.3% in 2018, The Wall Street Journal reports.

Aggregate earnings for the S&P 500 are expected to fall by 4.6% in 3Q 2019 versus the same period in 2018, per consensus estimates compiled by FactSet Research Systems. Among the first 75 companies to report as of the end of last week, the combined drop is 4.8%, worse than the consensus estimate. At least 16 of them have indicated that the rising dollar took a significant bite out of Q3 2019 profits, including such big names as Delta Air Lines Inc. (DAL), Johnson & Johnson (JNJ), General Mills Inc. (GIS), and Nike Inc. (NKE).


  • The U.S. dollar has reached its highest value since 2017.
  • This reduces the profits of U.S.firms that sell or operate overseas.
  • The impact on stock prices may not necessarily be negative.

Significance For Investors

A rising dollar has two negative impacts on the earnings of U.S.-based companies. First, goods and services priced in dollars and will become more costly to overseas customers in terms of their local currencies, thereby crimping demand. Second, the revenues and profits earned overseas by these companies in various currencies will be translated into fewer dollars when it comes time to produce their financial reports.

On the other hand, a rising dollar is a positive for companies that use or sell imported goods or services, since the dollar cost of these is declining. Nonetheless, the net impact of a rising dollar tends to be a negative on U.S. corporate profits, based on research by Jonathan Golub, chief U.S. equity strategist at Credit Suisse Group. He has calculated that, when the dollar rises by 7% to 8%, aggregate U.S. corporates profits fall by 1%, per Bloomberg.

Athletic apparel and equipment maker Nike is a company that both sells into overseas markets and bases production overseas. The three-month period ending on Aug. 31, 2019 was the first quarter of its 2020 fiscal year. Nike indicated in its quarterly report that revenues were up by 7% year-over-year, but would have increased by 10% on a currency-neutral basis. That is, the rising dollar shaved 3 percentage points off the revenue increase, a big number.

"We expect reported revenue growth in [fiscal year 2020] Q2 to be in line with our Q1 reported revenue growth. That assumes our strong currency-neutral revenue growth will be dampened by roughly 3 points of FX [foreign exchange] headwinds," Matt Friend, CFO of operating segments and VP of investor relations at Nike, stated in their FY 2020 Q1 earnings call. "The impact of tariffs will be most pronounced in Q2," he added.

Meanwhile, Delta also cited foreign exchange, more specifically, the rising dollar, as a "headwind" in its own Q3 2019 earnings call. They also noted: "Pacific is the only entity where revenue was down over prior year. This was due to a decline in corporate travel driven by tariff impacts on the automotive and manufacturing sectors and lower leisure demand to and from China."

Looking Ahead

David Lefkowitz, an equity strategist at UBS, estimates that the rising dollar will be "only a pretty modest driver" of S&P 500 earnings declines in Q3 2019, reducing them by just 0.5%, all else equal, versus the same period in 2018, per the Journal. Meanwhile, a study by S&P Dow Jones Indices cited in the same report found that the S&P 500 often posts gains while the dollar is appreciating, but tends to perform much better when the dollar is falling, perhaps due to the big boost given to overseas earnings.

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