The strong dollar is killing American companies’ profits by the billions

The strong dollar wiped out billions of dollars in second-quarter sales for US companies, prompting many to cut their guidance for the rest of the year.

The multi-million or multi-billion dollar leaderboard has grown by the day as the US currency hit a 20-year high this month, including IBM, Netflix, Johnson & Johnson and Philip Morris. This group is expected to swell as tech giants such as Apple and Microsoft – which generate a large portion of their business outside the US – release quarterly results in the coming days.

The currency shock disrupted a earnings period that has been closely studied for signs of a weakening global economy, as high inflation and tight monetary policy weigh on business and consumer demand. Economic data is already indicating a decline in activity, as inflation reduces the real purchasing power of consumers.

said Max Kettner, strategic analyst with HSBC.

The dollar received a boost from the Federal Reserve, as policymakers in Washington quickly raised interest rates in an attempt to cool inflation, which in June reached a 40-year high. They are expected to deliver another rate hike next week and continue to tighten policy this year to curb demand, raising interest rates well above their European and Japanese counterparts. High interest rates usually attract foreign investors, which leads to increased demand for the currency.

But US companies with large business abroad suffer because a strong dollar reduces the value of their international sales and makes them less competitive compared to domestic competitors. The slowdown across Europe and lockdowns in China designed to contain the spread of Covid-19 cases are also proving a thorn for US companies with large overseas operations as demand slows.

Last week, IBM warned that a strengthening of the US currency could reduce its revenue this year by $3.5 billion, including about $900 million in the second quarter. Johnson & Johnson cut its guidance as mouthwash maker Listerine warned that a rapid rise in the dollar could cut its sales this year by $4 billion. Currency pull on cigarette maker Philip Morris lost $500 million in the quarter. Netflix broadcasts, whose shows include dramas Weird thingsThe company estimated it received $339 million in sales between April and June due to the strong dollar.

They join a long list of companies that already raised this issue before the dollar rose to parity with the euro, including Microsoft, Salesforce and Medtronic.

“The speed of consolidation is the sharpest we’ve seen in more than a decade,” James Kavanaugh, IBM’s chief financial officer, said on the company’s earnings call. Of all the currencies we hedge, more than half are under double digits against the US dollar this year. So it’s kind of, I say, unprecedented.”

Kavanaugh said IBM has hedged 35 of the more than 100 currencies it operates in. It was a response, along with the big hit in foreign exchange rates, that left some investors “upset,” according to Diane Jaffe, senior portfolio manager at TCW. IBM shares fell 5 percent after its results, even as the company beat Wall Street expectations.

Big tech companies are highly exposed to the dollar given the industry’s external footprint. Goldman Sachs estimated that 59 percent of S&P technology company sales were originated outside the United States. This is well above the average publicly traded large-cap US corporations. The S&P 500 groups as a whole generated 29 percent of their $14 trillion in 2021 overseas revenue.

“Some companies struggle a little bit more than others with the dollar,” Jaffe said. “Although valuations have fallen a bit in the tech sector, we still want to be very important…prudent because of the foreign exchange concerns that affect tech companies the most.”

Returns showed that investors prefer stocks of companies that have mainly US companies. The Goldman Index of US companies with large international exposures has more than doubled this year compared to its domestic counterpart, falling 19.6 percent versus 9.1 percent, respectively.

For now, second-quarter earnings are still solid — overall they’re expected to have increased 10 percent from a year earlier. But, that number might have been closer to 12 percent had it not been for the impact of the strong dollar, estimates Jonathan Gollop, head of US equity strategy at Credit Suisse. He said that every 8 to 10 percent increase in the dollar index reduces roughly 1 percent of S&P 500 profits.

“The profits are coming in big, but just imagine how much better they would be if the dollar wasn’t strong,” Golub said.

The dollar’s effects on earnings often lag behind the actual currency conversion, so a strong dollar can be cited for several quarters to come even if the dollar’s rally slows. Karl Chamota, chief market strategist at Corpay, expects the dollar to peak now, as many investors are betting that the Fed will have to ease its aggressive pace of rate hikes as the US economy slows.

“The significant appreciation of the US dollar, especially in relation to the euro and the yen, has had a significant lag effect on earnings that we are likely to see over two quarters,” Chamota said.