+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

A $93 billion corporate-profit headwind is about to become a tailwind

Oct 30, 2015, 23:06 IST

The strong US dollar has been a multibillion-dollar headache for multinational US corporations.

Advertisement

While it's good news for importers, it's bad news for exporters. It is also rough on the companies that do a lot of business overseas. According to S&P senior index analyst Howard Silverblatt, S&P 500 companies generated 47.8% of 2014 sales overseas. This is why the strong dollar is the No. 1 thing S&P 500 companies have been complaining about.

FundStrat Global's Tom Lee estimates the US dollar's strength will have cost S&P 500 companies $93 billion in profits this year.

The prospect of tighter monetary policy via interest-rate hikes has many fearing that the dollar could actually get stronger. But history shows the exact opposite tends to happen.

"In many of our recent conversations, we sense many clients are uncomfortably 'long cash' but reluctant to add equity exposure (or even more beta)," Lee wrote in a note to clients on Friday. "Among the concerns is the pending Fed rate increase - investors expect the USD to rally, undermining equities and furthering headwinds to S&P 500 EPS and also amplified stress for EM borrowers (USD denominated debt). History says consensus is wrong and counterintuitively, when the Fed moves to neutral from easy (11 most recent cycles), USD weakened 55% of the time, with a median decline of 7% in the first year."

Advertisement

In other words, this headwind to S&P 500 profits - which Lee estimates at $128 per share in 2015 - could soon become a tailwind.

"Perhaps the most important [positive when USD weakens] is the potential for 2016 positive EPS revisions - after all $10.11 was subtracted from S&P 500 from the 'unhedged' move in USD," Lee added. "A 7% decline in USD, on top of the 6% fall from peak would suggest 75% of the rise in the USD would reverse in 2016 (adding back $7.50). Moreover, many [emerging market] corporates have USD and EUR denominated debt - hence, weaker USD alleviates credit risks to an extent."

Lee is bullish, and he sees the S&P 500 hitting at least 2,325 before the bull market ends.

FundStrat Global

NOW WATCH: Here's the Bill Cosby joke Eddie Murphy did at the Kennedy Center that everyone's talking about

Please enable Javascript to watch this video
You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article