Surging dollar: biggest threat to corporate earnings since 2008

Tuesday, 07 April 2015
ANALYSIS

The dollar has gained 22 percent in the past year, becoming the biggest threat to corporate earnings for multinationals around the globe. Fashion industry big players are not alien to this trend, 

with the likes of H&M, Versace or Guess?, just to mention but a few, warning on the negative effect of the American currency’s strengthening.
 

As reported by Reuters, the surging value of the US dollar may be posing the biggest threat to US corporate earnings since the 2008 financial crisis, hurting results at most US-based multinationals.

It is noteworthy that the dollar has seen its value up by 22 percent over the past year, while other major currencies have seen better times long ago. This duality poses a growing threat on US companies with big sales abroad.

 

Revenue and earnings from foreign markets are worth less when translated into greenbacks and their costs become relatively less competitive against rivals producing in countries with declining currencies, explain market experts quoted by Reuters.

Main international retailers can be hit by ‘earnings recessions’

In this sense, strategists at Bank of America/Merrill Lynch have even pointed to an "earnings recession," which is generally defined as at least two successive quarters of declining earnings from the year-earlier quarters.

Wall Street analysts currently estimate earnings growth of 1.3 percent for 2015, down from a forecast of 8.1 percent at the beginning of the year, according to Thomson Reuters data. The S&P 500's earnings per share are expected to drop 3.1 percent in the first quarter and 0.7 percent in the second quarter before recovering modestly in the second-half of the year.

"This is just the beginning," said Richard Bernstein, CEO of Richard Bernstein Advisers in New York. "This impact of the dollar on US earnings could last for three to seven years. It may not happen every quarter but there's a secular risk to US earnings, primarily to multinationals, as the dollar appreciates."

Nearly one-fifth of S&P 500 companies have warned on earnings for the first quarter, with at least 49 companies mentioning the effects of the dollar on results, according to Thomson Reuters. Likewise, Goldman Sachs data highlights that international revenues account for about one-third of S&P 500.

Consequently, North American public companies could lose more than 25 billion dollars in revenues in the first quarter alone, because of currency-related volatility, said Wolfgang Koester, chief executive of FiREapps. The fourth-quarter effect was circa 18.66 billion dollars, added Koester.

Christopher Svezia, an analyst at Susquehanna Financial Group, also said recently that currency headwinds are expected to affect most American companies that export abroad.

Among those that have warned are apparel retailers Michael Kors (KORS.N) and fashion accessories company Fossil Group (FOSL.O), both saying their results would be hit by currency issues. Similarly, earlier this month, Hennes & Mauritz AB reported a 36 percent jump in net profit for the first quarter, but still it cautioned that the stronger dollar will result in gradually increased purchasing costs for the coming quarters.

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