Dive Brief:
- Companies in the Standard & Poor’s 500 index generating more than half of sales outside the U.S. suffered on average a 4.7% slump in earnings during the third quarter because of the headwind from a strengthening dollar, according to FactSet.
- In contrast, S&P 500 companies that yield more than 50% of sales within the U.S. saw 6.8% growth in earnings during Q3, FactSet said, blending data for companies that reported Q3 results with estimated results for those that have not yet reported.
- During the third quarter the dollar rose 3.2% against a basket of six currencies that includes the euro, British pound and Japanese Yen.
Dive Insight:
The dollar has changed little this quarter compared with other major currencies but will probably strengthen in coming months as the U.S. outpaces the growth of most other advanced economies, economists said.
“Although the dollar’s rally has stalled in recent weeks, we expect further strengthening through year end given the comparatively strong macro in the U.S. versus other developed markets,” Ginger Chambless, head of research at JPMorgan Chase Commercial Banking, said in a report.
The U.S. economy this year will probably expand 2.1%, exceeding growth in the euro area, U.K. and Japan of 0.7%, 0.5% and 2%, respectively, according to the International Monetary Fund. The trend of stronger U.S. growth will likely continue next year, the IMF said in a forecast on Oct. 10.
The dollar has gained against other currencies as the economy exploded forecasts of recession this year.
U.S. gross domestic product rose at a 4.9% annual pace during the third quarter, largely fueled by a 4% gain in consumer spending, the Commerce Department said Thursday. Consumer outlays rose just 0.8% during Q2.
The economy “outperformed expectations along three key dimensions: growing economic output, labor market resilience and slowing inflation,” Eric Van Nostrand, acting assistant Treasury Secretary for economic policy and Tara Sinclair, deputy assistant Treasury Secretary for macroeconomics, said in a statement Thursday.
“Most advanced economies are below the trend growth path that they were on before the pandemic — except the United States,” they said, adding that the U.S. economy this year will likely reach the GDP level indicated by the pre-pandemic trend.
Earnings at companies with “international revenue exposure” such as Pfizer, Chevron and Exxon Mobil are especially vulnerable to a strong dollar, FactSet Senior Earnings Analyst John Butters said.
Pfizer said in its Q3 earnings release on Tuesday that it estimates a loss of $1 billion in revenues this year “as a result of changes in foreign exchange rates relative to the U.S. dollar compared to exchange rates from 2022.”
From 2021 through 2022, Pfizer reported a $5.5 billion hit to revenue from shifts in foreign exchange. The company last year generated nearly $58 billion in revenue outside the U.S., or about 58% of total revenue, according to Statista.
