The Impact of a Strong Dollar on Corporate Earnings
Key Takeaways:
* The US dollar has surged over the past six months, impacting corporate earnings.
* Companies with significant overseas revenue have been particularly affected.
* The dollar's strength is driven by factors such as Trump's policies and the Federal Reserve's stance on interest rates.
* Goldman Sachs predicts further dollar appreciation over the next twelve months.
Impact on Companies with Overseas Revenue
A strong dollar negatively affects companies that conduct a majority of their business overseas. This is because it leads to slower revenue and earnings growth due to less favorable foreign exchange conversions.
Examples include:
* Apple (AAPL): 58% of revenue from international sales
* Alphabet (GOOG, GOOGL): 50% or higher of overseas sales
* Microsoft (MSFT): 50% or higher of overseas sales
* Tesla (TSLA): 50% or higher of overseas sales
* Meta (META): 50% or higher of overseas sales
These companies have all issued warnings regarding the dollar's impact on their earnings.
Even Amazon (AMZN), which generates only 23% of revenue overseas, reported a $900 million headwind from foreign exchange in Q4. The company predicts slow revenue growth in the first quarter due to an unfavorable impact of approximately $2.1 billion from exchange rates.
Other companies affected include McDonald's (MCD) and Coca-Cola (KO), which have both forecast currency headwinds for 2025.
Drivers of Dollar Strength
The dollar's recent strength is primarily driven by two factors:
* Trump's policies: Proposed tariffs and tax cuts have raised bullish sentiment around the dollar.
* Federal Reserve policy: The Fed's stance on easing has been recalibrated due to strong economic data, which has supported the dollar.
Since September, the US Dollar Index has rallied over 7% and is hovering near two-year highs.
Outlook
Goldman Sachs predicts further dollar appreciation of 3% over the next twelve months. This will continue to impact companies with significant overseas revenue.