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The Strong Dollar Is Dragging Down US Companies’ Revenues

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Dec. 4 2020, Updated 10:42 a.m. ET

Among the U.S. companies whose sales results fell short of expectations, according to Bloomberg data: IBM (IBM), Verizon (VZ), Yahoo (YHOO), United Technologies (UTX) and even Apple (AAPL). As earnings reports and analyst call transcripts show, many of the companies reporting sales misses cited the strong dollar as a contributing factor. Unfortunately, this may prove a problem in the third quarter as well. Improvements in the U.S. economy have more investors convinced that the Federal Reserve (or Fed) will begin lifting interest rates later this year, perhaps as early as September. Such expectations will likely continue to support the dollar.

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Market Realist – The US dollar (UUP) has been climbing steadily over the past year on the back of the slump in oil prices and the Greek debt crisis. Though the strengthening dollar indicates faith in the US growth story, it’s acting as a major headwind for companies with operations abroad. The rise of the dollar causes US-produced goods to become costlier, which affects exporters and drags down revenues. The graph above shows how currency headwinds have been dragging down revenues and corporate earnings. According to estimates by FactSet, for S&P 500 companies with more than 50% of sales outside the United States (ex-energy), revenues have declined by 2.1% while earnings have declined by 0.2% in the second quarter (as of July 24, 2015).

Only 54% of the 187 S&P 500 companies that have reported earnings so far are reporting revenues that have surpassed analyst expectations. You can see this in the graph above. The long-term average of revenue exceeding estimates has historically been 61% (Source: FactSet).

According to data from FactSet, the blended earnings growth rate so far is -2.2%, which could mark the first earnings decline for the S&P 500 since 2012. Revenue growth so far has been an abysmal -4%. You can see this trend in the graph above.

Weakness in revenues is causing jitters among investors. Microsoft (MSFT) posted a steep 5% decline in year-over-year revenues to $22.18 billion. The fall was driven largely by the company’s dwindling smartphone division. The phasing-out of Windows XP support caused a decline in Windows sales to original equipment manufacturers (or OEMs), adding to Microsoft’s revenue woes. The roll-out of Windows 10 may help bolster revenues next quarter.

Apple beat revenue and earnings estimates last quarter. However, the company announced the forward guidance for revenues in the current quarter to be $51 billion, lower than analyst expectations. Investors are worried about the markets maturing, leading to a plateauing in revenues from the iPhone. The slowdown in China is also dragging down investor sentiment.

IBM Corp. (IBM) reported a whopping 13.5% decline in revenues on a year-over-year basis. The fall was driven by a 10% decline in the company’s software revenues. As Bloomberg reported, this marks the company’s 13th straight fall in quarterly revenues. Pfizer (PFE) and Proctor and Gamble (PG) have also reported a decline in revenues by 7% and 9.2% respectively, on account of currency headwinds.

With the Fed’s rate hike looming in September, the dollar is expected to stay strong in the year ahead. This could further affect revenues.

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