As the second quarter plays out, it seems analyst predictions have been right on the money.
Businesses Negatively Affected by Currency Exchange Rates
As of early August 2019, S&P 500 growth was predicted to decrease by 0.7 percent in the second quarter of 2019, according to a blended earnings report analysis by financial data company FactSet.3 And a late July report from FactSet found that companies with more than half of their sales taking place outside the U.S. saw earnings growth fall by an average of 13.6 percent, while those whose sales were more than half from domestic sources sales saw a 3.2 percent increase in earnings.4
Why the steep drop in international earnings? A strong dollar currency exchange rate means overseas profits can diminish when translated back into USD. Similarly, a strong dollar means U.S.-produced goods become more expensive overseas, potentially hurting export companies. Here’s what some businesses have to say about the effects of foreign exchange rate risk in their most recent earnings calls:
- AGCO tractor company said it lost 5.7 percent of its reported sales to a stronger U.S. dollar in the second quarter.5
- Apple said foreign exchange headwinds affected top-line growth by 300 basis points compared to a year ago, equivalent to about $1.5 billion of revenue.6
- Alphabet saw negative FX headwinds as well, affecting both revenue and operating income. In their earnings call, Chief Financial Officer Ruth Porat said, “Based on the strength of the U.S. dollar to-date relative to the third quarter last year, we expect continued FX headwinds again in the third quarter.”7
- McDonalds saw second quarter results impacted by $0.07 per share due to a strong dollar.8 The company also expects currency exchange rates to impact the third and fourth quarters of 2019.
- Procter & Gamble said “Foreign exchange, commodities, transportation costs and tariffs created a $1.4 billion fiscal year after tax headwind, a 13 point negative impact on core earnings per share.”9
- Nike had expected foreign exchange rates to turn into a tailwind, but said a strong dollar and geopolitical dynamics in the last year led to FX headwinds of over $1.4 billion in the company’s reported revenue.10
- Clothing company Levi Strauss & Co cited the negative effect of the dollar on its latest earnings call,11 as did medical equipment and pharmaceutical company Johnson & Johnson.12
A Look at Global Economic Uncertainty Going Forward
These days, currency risk arising from uncertainty in the evolving economy seems to be the name of the game. For example, the Wall Street Journal has reported “The dollar has consistently defied analyst projections that it will finally soften as the 10-year-old U.S. economic expansion ages.”13
U.S. Federal Reserve Chairman Jerome Powell lowered interest rates in late July. Many expected the dollar to weaken, since currencies tend to decline in value along with interest rate movements. Instead, the dollar rose to its highest point in over two years.14 This paradoxical behavior might be part of a “new normal” contributing to recent global economic instability.
Considering continuing trends of FX uncertainty from a strong dollar, political uncertainty and complex trade relationships, experts are expecting an “earnings recession” in the third and fourth quarters of 2019, continuing into 2020.15 Like an economic recession, an earnings recession is generally defined as two consecutive quarters of declines, according to Marketwatch.16 According to the same source, the last time S&P 500 earnings-per-share declined in back-to-back quarters was in late 2015 and early 2016.
