Strong Dollar and Inflation Hurt S&P 500 Companies
The head of equity research at Morgan Stanley said in a note that a stronger US dollar and higher inflation will be strong headwinds for future S&P 500 earnings and will put a lid on the recent rally in the stock market.
The US Dollar Index is already up 16% annually, reaching 108.04 at 10:15 AM ET. The relative strength of the dollar against a basket of foreign currencies bodes weakly for US companies that do so much of their business abroad, as other countries shun more expensive US products.
“This could not come at a worse time as companies are already struggling with margin pressures from cost inflation, high/junk inventories and slowing demand,” wrote Mike Wilson of Morgan Stanley.
Morgan Stanley said the jump in the dollar against other currencies is “as severe as it is,” adding that a 16% rise in the dollar means a roughly 8% fall in earnings per share for Standard & Poor’s 500 companies. This will build on the already dwindling demand from domestic consumers adjusting habits Spending they have to deal with the highest rate of inflation in more than 40 years.
“The strength of the dollar is just another reason to believe that earnings revisions will decline over the next few earning seasons,” the bank said. “The recent rally in stocks is likely to fade before long.”
The dollar is also expected to continue gaining strength, at least until
Makes a pacifist pivot policy, which seems unlikely in the near term. The US central bank has been raising interest rates since March to cut rates, and is likely to raise them another 50-75 basis points at their next meeting at the end of this month.