The dollar index has surged 10%
The tech sector’s earnings season has been better than what was expected earlier this year, when expectations were dulled by the quickly deteriorating global economy. However, earnings growth has slowed down considerably from last year, and US-China tensions are a persistent threat.
Valuation in the tech sector has remained high, and the appreciating dollar poses an increasing risk to tech stocks, especially those with international exposure. The dollar index has surged ~10% over the last four months, dampening companies’ international revenue.
Dollar strength dampens growth
According to FactSet, revenue for S&P 500 companies with more than 50% of their sales outside the United States grew only 0.2% YoY (year-over-year) during the first quarter, whereas S&P 500 companies with less than 50% international sales exposure saw their revenue rise 7.3% YoY.
While several conditions could be contributing to this disparity, the strengthening US dollar may be the most important factor. If the global economy continues to slow, the dollar, seen as a safe currency, could continue to appreciate and dampen growth for big tech companies that operate in several countries. FactSet also pointed out that for 90% of the S&P 500 companies that have reported their earnings, earnings have fallen 0.5% YoY.