Investors are worried about stocks as the U.S. dollar strengthens in 2024.
The “surprise” dollar rally this year hurts U.S. company earnings, currency strategists at BoA Global Research wrote Tuesday. Last check, FactSet data showed the ICE US Dollar Index DXY, which tracks the greenback against six major currencies, up modestly Tuesday for a 4% gain this year.
According to FactSet data, 41% of S&P 500 revenues come from outside the U.S., leaving “the index open to the possibility of structurally lower earnings in a rising dollar environment,” Nicholas Colas, co-founder of DataTrek Research, wrote Tuesday. Because “non-U.S. profits are worth less than if the greenback were stable versus non-U.S. currencies.”
But “a stronger dollar does not affect all S&P sectors equally,” said Colas. “Sectors one might think of as quite global, like financials, have below-average non-U.S. revenues” (28%).
The DataTrek note shows that utilities have the lowest international revenue share and technology the highest.
DataTrek reports that communication services, materials, and technology are the only three S&P 500 sectors with above-average international revenue. The firm found that Google parent Alphabet Inc. GOOGL, +1.87% and Facebook parent Meta Platforms Inc. META, +0.55% drove international communication services revenues.
DataTREK Research Note emailed May 7, 2024
Based on Tuesday afternoon trading, FactSet data shows the S&P 500 SPX up 8.7% in 2024, with nearly all sectors rising. At last check, communication services XX:SP500.50 gained more than 18%, followed by technology XX:SP500.45 and energy XX:SP500.10, which gained 11% each. Only real estate XX:SP500.60 was down almost 7% year-to-date.
“While a weaker dollar would be welcomed both in terms of its effect on S&P earnings and for what it says about global investor confidence,” Colas said, “a stronger greenback has not held back” U.S. stocks or corporate cash flows over time.
U.S. dollar strength “has been part of the global investment and commercial landscape for almost 20 years,” says DataTrek.
“While global investor risk appetites have fluctuated, the long-term trend is to a stronger dollar,” said Colas. “Tech stocks have obviously thrived during the dollar’s long bull market.”
