15 January 2025

Written by Jamie MacGyver

ORLANDO, Fla. (Reuters) – Although “American exceptionalism” has undoubtedly helped push Wall Street returns to record levels in recent years, we should not confuse it with isolationism.

The fourth-quarter earnings season in the United States, which begins in earnest this week, is a reminder that American companies — great as some of them may be — are still operating in the global marketplace. A weak economy and lackluster demand abroad, combined with a strong dollar, could erode the profitability of American companies, calling into question whether the United States is so exceptional after all.

With the value of the dollar rising widely and rapidly, exchange rates will soon impact corporate profitability. The question is how deep.

Analysts at Apollo Global Management (NYSE:) indicate that more than 41% of companies' revenues come from abroad. This is the highest since 2013 and not far from the record high of 43.3% in 2011.

This leaves these companies vulnerable on two levels. First, subpar growth in several major economies and trading partners such as China, Canada and Europe should, all else being equal, weaken demand for US goods. Second, the value of revenues accumulated abroad will now be much lower in dollar terms than they were one year ago.

The dollar is on a tear. It has risen 10% since late September and is up 7% year over year. It is now the strongest in more than two years against a basket of G10 currencies, hitting multi-year highs against the pound and the Canadian dollar.

There is little sign of this trend reversing anytime soon, as resilient US growth and steady inflation push up Treasury yields and force investors to radically rethink the Fed's 2025 outlook. Economists at Bank of America no longer expect any cuts. in interest rates this year, and others even suggest that the central bank's next move may be to raise interest rates. On the other hand, Goldman Sachs analysts on Friday raised their expectations for the dollar to be “stronger for a longer period.”

Dollar privacy

Although much of the classic economic playbook has been shredded since the pandemic, the theory remains that a 10% year-over-year dollar increase would reduce S&P 500 index gains by about 3%, according to Bank of America. Currently, estimates are for 9.5% growth in total EPS for the fourth quarter, and 14% for calendar years 2025, according to LSEG I/B/E/S.

But revenue growth in the fourth quarter is estimated at only 4.1%, a relatively slow pace due in part to the exchange rate.

Equity analysts at Goldman Sachs say that the “rise” in revenue tends to be lower in periods of a strong dollar than in periods of a weak dollar. So it is reasonable to expect that the share of companies that beat consensus sales expectations this quarter will be lower than the 42% that did so in the previous period, when the dollar's year-on-year rise was only 2%.

But although the stronger dollar is likely to feature in many CEO and CFO calls this earnings season, its impact on U.S. earnings may be more “idiosyncratic” than widespread, according to Morgan Stanley (NYSE:) Mike Wilson.

He noted that stocks of companies with “relatively low exposure to foreign sales and low sensitivity to a stronger dollar from an EPS growth standpoint” have begun to outperform since the dollar began to strengthen in October.

It describes “low” foreign exposure for companies that derive less than 15% of their revenues from abroad, giving them “minimal” sensitivity to the dollar exchange rate. Some of the big names in this camp include United Healthcare, T-Mobile, and Home Depot (NYSE:), while some larger companies that derive more than 15% of their revenues from abroad include PepsiCo (NASDAQ:), IBM (NYSE:) and Oracle (NYSE:).

© Reuters. File photo: People walk around the New York Stock Exchange in New York, United States, December 29, 2023. REUTERS/Eduardo Munoz/File photo

The strength of the dollar has not yet reached the level that poses a real threat to the ability of American companies to compete and their profitability. But if it holds, this earnings season could be a glimpse of what's to come.

(The opinions expressed here are those of the author, a Reuters columnist.)

(Writing by Jamie McGeever, Editing by Andrea Ritchie)

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