US interest rates are expected to increase soon, and other central banks around the world are keeping rates low, upping demand for the dollar.
And in a note Friday, Deutsche Bank's David Bianco slashed his forecast for 2015 earnings per share because of the dollar's rally.
The concern among investors is that the stronger dollar will reduce the value of earnings abroad.
As a result, Bianco reduced his EPS forecast to $118, the same EPS estimate for 2014, meaning that in 2015, Bianco expects that S&P earnings growth will be approximately 0.
"We cut 2015E S&P EPS to $118 from $120 on rapid dollar appreciation," he wrote.
Here's how the math works out:
"A third of S&P 500 sales and 40% of its profits are from abroad, but only ~25% of its profits are earned in foreign currencies. Thus, every 10% appreciation in the dollar vs. major currencies hits S&P EPS by 2.5% or $3
And here's the impact by sector:
"In 2015, we see 5% FX headwind at Tech, 4-5% at Industrials, 4% at Staples and Materials, 3.5% at Health Care, and 3% at Consumer Discretionary. Energy has low direct FX sensitivity, but dollar influences oil prices."
Bianco also changed his forecasts for the dollar and the euro:
"We assumed Euro averages $1.10-1.15 in 2015 and DXY 90-95. We now assume ~$1.05 and 100. Continued strong US job growth despite still slow GDP has put the first Fed hike credibly on the horizon, which underlies recent dollar gains."
Last week, Bianco said the S&P 500 could dip anywhere between 5% and 9% in the near term, and in his latest note says the next 5% move in the benchmark index will be lower.
Most S&P 500 companies earn the bulk of their sales and profits are earned in the US.
Deutsche Bank
And here's a big chart showing the S&P 500's performance against the US dollar.
Deutsche Bank