The Impact of a Strong US Dollar on Corporate Earnings

Over the past six months, the US dollar (DX=F, DX-Y.NYB) has experienced a significant surge, impacting the earnings of numerous corporations. S&P 500 companies have increasingly cited foreign exchange headwinds in their financial reports, a trend analysts had predicted.

A strong dollar negatively affects companies with significant overseas operations, reducing revenue and earnings growth due to unfavorable currency conversions. Notably, megacap tech giants generate a substantial portion of their revenue internationally. Apple (AAPL) reported that 58% of its recent quarter's revenue stemmed from international sales. Other tech titans like Alphabet (GOOG, GOOGL), Microsoft (MSFT), Tesla (TSLA), and Meta (META) reported percentages of 50% or higher.

These companies have issued warnings about the dollar's strength in their earnings releases. Amazon (AMZN), with 23% of its revenue generated overseas, reported a $900 million foreign exchange headwind in Q4, exceeding expectations. The company anticipates a first-quarter revenue growth rate between 5% and 9%, potentially the slowest in its history, due to unfavorable currency impacts.

McDonald's (MCD) expects foreign currency headwinds to impact its 2025 EPS. Coca-Cola (KO) forecasts a 6% to 7% currency headwind against its EPS growth, while Johnson & Johnson (JNJ) predicts a $1.7 billion reduction in full-year sales.

The dollar's strength has primarily been driven by the election of President Trump, the subsequent Republican sweep, and the recalibration of Fed easing in response to strong economic data. Since September, the US Dollar Index (DXY) has rallied over 7%, hovering near its two-year highs.

Trump's proposed policies, including high tariffs on imported goods and tax cuts for corporations, have contributed to dollar bullishness due to their protectionist nature. Economists predict that these policies will fuel inflation and force the Fed to maintain higher interest rates.

Goldman predicts the dollar will strengthen by another 3% in the next 12 months.