We have previously discussed that we see the end of the dollar’s rally coming into view, and that further reasonably-sized rallies (~2-3%) over the next 1-3 months should be used to take profits on long dollar positions. The DXY has rallied over 7% this year, and a common question we have received is how big an impact the higher dollar will have on US earnings. The general belief is that it should be quite negative, but a dispassionate look at the data makes this a hard assertion to prove.
Firstly, although the share of foreign profits in US firms’ earnings has risen over the last decades, it is only around 20%, much less than it was in 2000 and 2008 (top-left chart). Also, the US does not have a particularly high share of revenues from abroad (and earnings are not much different). The top-right chart shows that the US receives a smaller proportion of revenues – 37% using MSCI US – from abroad than any other major region. Using the S&P500 it is even lower, at 30%. Therefore, we are not surprised to see there is little relationship between annual changes in the dollar and S&P earnings, with the ups and downs in the dollar having little connection with the ups and the downs in earnings (bottom-left chart). Earnings are biased lower, however, based on several LEIs, but the dollar is not a direct cause of this. For example, the last chart shows that small business sentiment is pointing to lower earnings over the next year.
(Click on image to enlarge.)
Source: Bloomberg, Macrobond and Variant Perception