The U.S. dollar’s surge this year is likely to dent third-quarter earnings at big multinational corporations and stir consternation in a stock market that is already grappling with trade tensions and higher interest rates.
The greenback has risen 4.3% against a basket of 16 other currencies in 2018, even after growth slowed this quarter to 1.9%. The stronger dollar makes converting foreign profits into the U.S. currency more expensive, dragging earnings lower at dozens of companies including Johnson & Johnson Nike Inc. and Goodyear Tire & Rubber Co.
Although companies in the S&P 500 are expected to report another period of double-digit profit growth, more firms are issuing warnings ahead of earnings season—and currency fluctuations are one of the primary factors to blame. About 76% of the 98 companies that have given projections have issued negative guidance, which is above the five-year average, according to FactSet.
Overall, profits are expected to increase 19% from a year earlier in the third quarter, marking a slowdown from the 25% growth notched in the first and second quarters, according to the data provider. Robust corporate earnings have helped propel U.S. stocks to record highs this month, but concerns about peaking profits, along with ongoing trade tensions and monetary tightening by the Federal Reserve, have spooked investors for much of the year.
“The move in currencies has been underappreciated,” said James Tierney, a portfolio manager with AllianceBernstein. “The dollar’s rise and the moves in developing-market currencies have truly been staggering, especially for companies with huge exposure to India, Latin America and Asia.”
Online auction house eBay Inc. warned over the summer that the dollar’s strength would likely knock $150 million off its revenue for the year, while Johnson & Johnson has said the currency’s jump forced it to trim its revenue projections and narrow its earnings estimate.
Athletic apparel powerhouse Nike, which reported its latest quarterly earnings Tuesday, said the dollar has been a “slight headwind” over the past three months and will curtail revenue growth for the year.
Nike got roughly 65% of its revenue from overseas last year, with China and Canada among the biggest foreign markets for the maker of sneakers and sportswear, according to FactSet.
Many companies attempt to limit the impact of currency swings through hedging programs. Nike Chief Financial Officer Andrew Campion, for instance, said this week on a conference call with analysts that the company’s hedging program delays the impact of foreign-exchange movements on its profitability for 12 to as many as 24 months.
But the program, as well as those run by some other companies, tends to hedge for developed-market currencies, such as the euro, and not emerging markets. Many of those countries service their debt using the greenback, making them more economically sensitive to the dollar’s moves. Nike said it isn’t “economical” to hedge for currency risks in countries like Turkey, Argentina and Brazil, and its exposure in China is only partially hedged.
At Goodyear Tire & Rubber, the dollar’s gains against the lira, Brazilian real, yuan and the euro have been punishing this year. The tire maker warned over the summer that the dollar’s ascent against those currencies will sap $60 million from its operating income for the year. That’s on top of a projected $70 million shortfall due to softening market conditions in China.
With a foreign revenue exposure of roughly 56%, Goodyear Chief Executive Richard Kramer warned at a Morgan Stanley conference earlier this month that the translation effects of converting those overseas earnings into dollars have been having a “big impact.”
Clorox Co. , the maker of home-care and personal products from Glad trash bags to Burt’s Bees lip balm, attributed the previous quarter’s 2% drop in international sales to the devaluation of the Argentine peso.
The currency headaches are expected to continue and shave 2% from its total sales in fiscal 2019, Chief Financial Officer Kevin Jacobsen said at a Barclays consumer-staples conference this month.
Although the dollar has given up some of its gains in recent weeks as the euro and Japanese yen strengthened, several factors could propel the U.S. currency higher over the next several months.
The dollar could rise if the U.S. economy continues to grow at a rapid pace in line with the second quarter’s 4.1% gross-domestic-product reading, said Peter Wilson, global fixed-income strategist at Wells Fargo Investment Institute, in a recent note.
Renewed trade tensions could also support another leg of the dollar’s rally. Although most investors agree tariffs would be a drag across much of the economy, the U.S. is expected to better withstand a sharp escalation in the trade spat than other countries, such as China.
And rising interest rates could make the dollar more attractive to investors who are searching for higher-yielding investments. The Federal Reserve proceeded with its third rate increase in 2018 this week and has plans for one more this year and another four in 2019.
Still, Mr. Wilson and other analysts are wary of giving a near-term outlook given the uncertainty, but most agree that the dollar should be able to ride out the rest of the year relatively strongly before giving up some of those gains in 2019. And the dollar’s ongoing strength could continue to beleaguer executives of multinational corporations.
“We now expect a relatively flat profile for the dollar versus the euro from now until year-end,” wrote Mr. Wilson, but he added that the currency’s situation remains “finely poised at the moment, with risks in both directions.”
Write to Michael Wursthorn at [email protected]