After the powerful 2024 and the vibrant final stretch of 2023, US equities face a true inflection point. With the high rates of the Federal Reserve, skyrocketing bonds and an already frenetic journey in the main indices, there are those who are already warning of a possible correction in the S&P 500. An option on which there is no consensus, since the measures that could that President-elect Donald Trump will apply when he enters the White House this January, particularly the tax cuts, have encouraged many in the idea of another big stock market boost. However, now experts are warning of a threat that will begin to be tested with the results season and that has come with the arrival of the Republican: a strong dollar that knocks down the great engine of Wall Street.
This Wednesday the results season began with the release of the bank. JP Morgan, Goldman and Citi They have given the starting signal and Morgan Stanley and Bank of America They continue tomorrow Thursday. Starting next week the carousel of figures begins with Netflix, Charles Schwab, J&J, P&G or American Expressamong others. The good business figures that have been happening quarter after quarter are one of the great explanations why the US has been able to maintain its economic strength.
In the summer, employment data that seemed to weaken raised alarm bells of a recession, a fear that fueled the idea of an aggressive path of Fed rate cuts with up to seven in 2025. However, it was a false alarm, the labor market held up and, in particular, the good health of companies, which give a good account of the strength of consumption in their figures and do not have to resort to layoffs.
From Schroders they explain that business results are usually one of the first alerts of the health of an economy. “When economic activity is going well, consumers tend to spend more and commercial activity increases. As a result, companies’ margins improve“. That is why the results have been looked at with a magnifying glass quarter by quarter now, experts such as those at Morgan Stanley warn that they may begin to feel for the first time the negative blow that the high valuation of the dollar represents in the accounts of companies. most important on Wall Street.
The US Dollar Index, which measures the valuation of the currency against a basket of international currencies, shows a powerful awakening to 109 points, thus marking an advance of 5.11% since November and 8.87% since October. Increase practically identical to that produced in its exchange with the euro (+5.7% since November). In this way each dollar is exchanged for 0.971 euros. Chris Turner of ING explains that “the inflation-adjusted dollar exchange rate is at its highest level since 1985.” A situation that can occur thanks to “the policy of tariffs, immigration control, fiscal stimulus and regulatory relaxation” that is expected from Trump. All these factors added to “a strong economy” are unleashing”a path of dollar strength.” The Dutch bank believes that it “will continue to rise” and that it will even lead to “central banks in the rest of the world being forced to intervene to support their currencies.”
Mike Wilson, Morgan Stanley’s star analyst, explained in his report to clients this Monday that “a stronger dollar is likely to add to a recurring phenomenon in earnings season: an increase in the dispersion of reviews In other words, a small parade of downward revisions to the target for the full year is expected to begin, especially for those companies that have a good part of their business abroad.
“We see that this result (the impact of the rise in the dollar) will play out this season,” said Wilson. In summary, “our analysis shows that we should see an increase in mentions of monetary impact this earnings season. The powerful domestic market of the US will allow many companies to grow, in any case, but it will generate a great dispersion between those that look the most abroad and those that have most of their business in North American territory.
Morgan Stanley is not the only one to realize this reality. US Bank experts explained in a recent report on the dollar that “a strong dollar reduces income for multinational companies. The net income obtained from sales abroad will decrease once converted to dollars. In summary, US companies will be less competitive due to the high price of the product when translated into euros, which will clearly lead to lower sales as foreign buyers opt for other cheaper firms.
Bank of America: “For every 10% rise in the dollar, the profits of the S&P 500 are reduced by 3%”
Apollo has also spoken about this issue in a report this Tuesday. The fund commented thate “more than 41% of the revenue of S&P 500 companies comes from abroad“, the highest figure since 2013 and not far from the record of 43.3% in 2011. According to the firm this “leaves companies vulnerable, as demand for goods may weaken.” Bank of America has been even more clear and openly spoke that the strong dollar will reduce the gains of the index this final earnings season by 3% According to its latest study, each 10% increase in the price of the ‘greenback’ has this same impact on joint earnings. of the S&P 500.
In any case, this situation is not, today, definitive for a buoyant moment for US companies. In fact, according to the estimates of BloombergHE expects earnings growth of 4.1% for this quarter and 14% for 2025. Although this is positive progress, it already represents a slowdown compared to the 4.4% in the third quarter. Both figures are very far from the powerful 13.2% of the second quarter. In both cases, the strength of the currency is playing a certain role, although the concern, beyond a generalized impact, is that the dollar attacks Wall Street’s main growth engine, technology.
The ‘big tech’ are the biggest losers
So far, the S&P 500’s massive 23.3% rise in 2024 is completely inexplicable without the technology sector. If we remove the large technology companies from the index known as the magnificent seven (Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta and Tesla) this advance is frustrated to only 6%. These seven values alone represented an increase of 53.7% with their advances. accumulate 30.6% in these few hands of the entire capitalization of the index.
The reason these companies are performing so well comes from the growth in their income from items related to Artificial Intelligence, which is encouraging investors, who dream of This technological revolution continues to land. Aside from AI, these types of companies are experiencing great growth thanks to favorable tailwinds and their powerful cash position that allows them to face this time of high interest rates with guarantees.
However, technology companies are precisely the most exposed to the international market and, therefore, the ones that can pay the most for a strong dollar in their own results. Despite 41% of the S&P 500’s income comes from abroadthe technology sector sees this dependence widen to 59%. the same Nvidia It has sales outside the US representing 56% with China accounting for 17% of its turnover.
Same trend in Apple with close to 50% of its income coming from other countries. For tesla foreign dependency is 53.3%. Goal It has 23% of its turnover in Europe and 10% in China. Microsoft, for its part, has 49.13% of its income abroad. In Alphabetparent company of Google and YouTube, the figure climbs to 53%. The one where the least impact is seen is in amazonwith the international presence in its accounts at 27.3%.
“The pronounced strength of the dollar has left the task of pulling the wagon in the hands of large companies”
For now, these actions can continue to grow despite the hit by the dollar, if their results continue to justify the euphoria, but if not the currency effect will begin to be felt more clearly. A burden that comes at a time of certain doubt. Konstantinos Venetis, of TS Lombard, comments in a report this Wednesday that the recent increases in the S&P 500 and in particular in these stocks “make the index look expensive with earnings prospects very unbalanced.” The expert defends that “the pronounced strength of the dollar has left it in the hands of large companies to lead the way in terms of profit growth.
From Capital Economics, for their part, they say that, although they see the results increasing, they believe that there are five clear risks to them. “The first is declining demand for artificial intelligence (AI). The second is a slowdown in the economy. The third is a sharp rise in bond yields. The fourth is antitrust enforcement. And the Fifth is the growing geopolitical tension.” With some already threatening to materialize, the dollar enters the scene and it may be one more factor that ends up deciding the future of an S&P 500 that is facing a key moment.
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