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The Rising Dollar and Its Impact on Corporate Earnings

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The only loser in the week before last was the U.S. dollar. However, the dollar quickly recovered losses in the subsequent week. The dollar has been rapidly rising so far this year, putting many export-dependent companies in a difficult situation and forcing analysts to lower their forecasts of companies’ earnings. The dollar has appreciated by more than 25% against the basket of major currencies in the past year.

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Market Realist – At the beginning of the year, investors expected US economic growth to fuel corporate earnings. In turn, this was expected to propel markets forward. However, not only has the harsh winter put a damper on the economic indicators, the rising dollar took the wind out of the sails for the earnings season.

According to forecasts by Bloomberg, earnings are estimated to decline for three successive quarters. Earnings are expected to decline by 4.2% in 1Q15, by 4.2% in 2Q15, and by 1% in 3Q15.

The unprecedented rise in the dollar (UUP) is having a negative impact on corporate earnings. Tiffany & Co. (TIF) reported a decline in revenue by 1% for 4Q14. Its currency adjusted revenue growth comes to 3%.

Oracle (ORCL) reported a decline in net income of 2.7%. Adjusting for currency changes, Oracle’s net income would have grown by 7% in the quarter.

Hewlett Packard (HP) already indicated that earnings will likely take a hit of $0.30 per share for the year ending in October. This is due to currency woes.

According to BofA Merrill Lynch, 49 companies from the S&P 500 indicated that they will likely take a hit in earnings in the first quarter due to troubles related to currency.

Dollar and its impact on corporate earnings

The stocks of companies deriving more than 50% of revenue from abroad—like Coca-Cola (KO), Yum! Brands, McDonald’s (MCD), and Intel (INTC)— are taking a hit as well. The previous graph depicts data compiled by FactSet. It shows that companies with less than 50% of revenue in the US took a hit in average prices and median prices of -1.8% and 1.2%, respectively, from December 31, 2014, to March 26, 2014.

Turbulence is being caused by lower-than-expected economic data, the strengthening dollar’s impact on corporate earnings, and the “Fed effect.”

Read on to the next part of the series to understand the future outlook in the era of increased turbulence.

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