The Impact of US Dollar Strength on Corporate Earnings

The US dollar's surge in the past six months has significantly impacted corporate earnings. Companies across various industries, from tech giants to consumer brands, have cited foreign exchange headwinds in their recent financial reports and guidance.

Impact on Multinational Companies

Historically, a strong US dollar adversely affects companies with significant overseas operations. It leads to slower revenue and earnings growth due to unfavorable foreign exchange conversions. Major technology companies like Apple, Alphabet, Microsoft, Tesla, and Meta derive substantial revenue overseas. During their earnings calls, these companies expressed concerns about the dollar's strength.

For example, Amazon reported that foreign exchange headwinds reduced its revenue by approximately $900 million, exceeding expectations by $700 million. This led to a downward revision in its revenue growth forecast for the first quarter.

Impact on Other Industries

The impact extends beyond tech companies. McDonald's anticipates foreign currency to be a drag on its 2025 earnings per share (EPS), while Coca-Cola forecasts a 6-7% currency headwind on EPS growth. Johnson & Johnson expects a $1.7 billion hit to its full-year sales.

Drivers of Dollar Strength

The dollar's rally is attributed primarily to the election of President Trump and the Republican sweep in Congress, as well as the Federal Reserve's recalibration of its future easing plans based on strong economic data.

Trump's proposed policies, including tariffs, tax cuts, and immigration restrictions, have boosted dollar sentiment due to their protectionist nature. Rising inflation concerns have also contributed to the dollar's strength.

Outlook

Goldman Sachs predicts a further 3% appreciation in the dollar over the next 12 months. The strong economy, solid asset returns, and the threat of tariffs are expected to continue supporting the dollar's dominance.