The strong US dollar has been a multibillion-dollar headache for multinational US corporations.
While it’s good news for importers, it’s bad news for exporters. It is also rough on the companies that do a lot of business overseas. According to S&P senior index analyst Howard Silverblatt, S&P 500 companies generated 47.8% of 2014 sales overseas. This is why the strong dollar is the No. 1 thing S&P 500 companies have been complaining about.
FundStrat Global’s Tom Lee estimates the US dollar’s strength will have cost S&P 500 companies $93 billion in profits this year.
The prospect of tighter monetary policy via interest-rate hikes has many fearing that the dollar could actually get stronger. But history shows the exact opposite tends to happen.
“In many of our recent conversations, we sense many clients are uncomfortably ‘long cash’ but reluctant to add equity exposure (or even more beta),” Lee wrote in a note to clients on Friday. “Among the concerns is the pending Fed rate increase – investors expect the USD to rally, undermining equities and furthering headwinds to S&P 500 EPS and also amplified stress for EM borrowers (USD denominated debt). History says consensus is wrong and counterintuitively, when the Fed moves to neutral from easy (11 most recent cycles), USD weakened 55% of the time, with a median decline of 7% in the first year.”
In other words, this headwind to S&P 500 profits – which Lee estimates at $128 per share in 2015 – could soon become a tailwind.
“Perhaps the most important [positive when USD weakens] is the potential for 2016 positive EPS revisions – after all $10.11 was subtracted from S&P 500 from the ‘unhedged’ move in USD,” Lee added. “A 7% decline in USD, on top of the 6% fall from peak would suggest 75% of the rise in the USD would reverse in 2016 (adding back $7.50). Moreover, many [emerging market] corporates have USD and EUR denominated debt – hence, weaker USD alleviates credit risks to an extent.”
Lee is bullish, and he sees the S&P 500 hitting at least 2,325 before the bull market ends.
- FundStrat Global