The Trump dollar is taking a bite out of the earnings prospects for US companies.
Apple is boosting the prices of iPhones sold abroad by as much as 40% to offset the declining value of foreign sales when they’re converted to dollars. Those higher prices hurt Apple’s ability to compete. Industrial giant Honeywell International is trimming its sales forecast this year by $600mn and hedging in the currency markets.
Since Donald Trump’s surprise win on November 8, the Bloomberg Dollar Spot Index has gained 2.8% on expectations for rising interest rates, even as he told the Wall Street Journal the strong US currency was “killing us” and criticised China for keeping the yuan artificially low. Before the election, the greenback was already trading near the highest in more than a decade.
“Foreign exchange is a bit of a problem for Apple and any US company that has any business overseas,” Apple Chief Financial Officer Luca Maestri said in an interview. “The dollar is very strong.”
Earnings for Standard & Poor’s 500 companies are forecast to rise 11.9% this year after falling an estimated 0.4% in 2016, according to analysts’ estimates compiled by Bloomberg. That would be the fastest annual earnings growth since 2011. For the 259 companies that have reported fourth-quarter results so far, profit has expanded 5.8% from a year earlier and revenue has risen 4.2%, according to data compiled by Bloomberg.
A stronger dollar may hinder future profit gains, however. Every 10% increase in the US currency trims about 3 to 5 percentage points off earnings growth for the S&P 500, said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
“For those pencilling in 10% to 12% earnings growth, that shaves it quite a bit,” he said. “That could have some pressure on equity prices.”
While the dollar has weakened about 3% since reaching a 14-year high last month, it remains above the average level for 2016. And companies are still feeling the effects of a yearlong, 19% surge in the dollar beginning in the summer of 2014. Coupled with a plummet in oil prices, the surging dollar led to declines in S&P 500 earnings that lasted five quarters.
If Wall Street is right, companies face more dollar appreciation under Trump. Against the euro, for example, the consensus is for the dollar to strengthen to $1.05 at year-end from about $1.08 now. Bill Gross, the billionaire bond investor, says the president’s policies are fuelling a powerful dollar and an undervalued Mexican peso, both of which are bad for the US and global economy.
“I think the dollar is a concern,” Gross, who manages the $1.8bn Janus Global Unconstrained Bond Fund, said in a Bloomberg TV interview Wednesday. “It is the global currency. To the extent that the dollar strengthens, not only are US companies affected to the negative, the global marketplace and global countries are affected too.”
Honeywell, which makes products ranging from jet engines to work boots, has locked in the euro at $1.15 and hedges other currencies to protect its profits. The company had to cut the top range of its 2017 sales forecast to $39.5bn from $40.1bn “solely due” to foreign exchange, said CFO Tom Szlosek. For Eaton Corp, which makes parts for heavy trucks, aircraft and earth-moving equipment, the strong dollar has erased $2.5bn of revenue since 2013 and will likely reduce sales by $300mn this year, Chief Executive Officer Craig Arnold said.
“The US dollar strength has really been a big negative for us in terms of revenue for the company for four years in a row now,” he said. “If you’re an exporter, it makes the goods and services that you sell around the world more expensive.”
A wild card for the dollar is Trump’s plan to overhaul corporate taxes. Republicans have floated the idea of a 20% border-adjustment tax on imports as a way to encourage more manufacturing in the US That plan could cause as much as a 25% gain for the dollar, according to a report by the Peterson Institute for International Economics.