With S&P 500 companies set to notch their strongest quarterly earnings growth in about six years, a weaker U.S. dollar may help keep the profit momentum rolling and support share prices in the coming weeks.
After a dramatic week in Washington that rattled financial markets, one possible silver lining for stock investors was the weaker dollar, which can support earnings of U.S. multinational companies with large foreign operations.
The dollar weakened 0.5% against a basket of currencies on Wednesday following reports that U.S. President Donald Trump tried to interfere with an investigation into his former national security adviser’s ties with Russia, revelations that also sparked the S&P 500’s biggest one-day drop in eight months.
The currency was on track for its biggest weekly percentage drop in a year, and so far in 2017 the dollar has pulled back 5%, erasing post-U.S. election gains.
Dollar movements can be significant for U.S.-based multinationals. The stronger the greenback is against other currencies, the less valuable foreign sales become when translated into the U.S. currency for reporting purposes.
“A weaker dollar is arguably good for any company that sells overseas,” said Alan Gayle, director, asset allocation, RidgeWorth Investments. “If you’re talking about a silver lining, if you are a large-cap company that has significant overseas sales exposure, then this is an emerging positive.”
First-quarter profits are on pace to rise 15.2%, according to Thomson Reuters I/B/E/S. Second-quarter earnings are expected to rise 8.5%, a figure that could swell depending on currency moves. The dollar has fallen 3.2% in the second quarter alone.
Companies with significant global operations have already showed strength as the dollar has weakened in the first quarter.
S&P 500 companies with more than half their revenue from outside the U.S. reported a 13.2% increase in earnings, excluding the energy sector, compared with a 10.6% increase for companies with half or more of revenues coming domestically.
