The S&P 500 may receive a lift from a softening U.S. dollar, according to market analysts.
“A weaker dollar is a positive sign about global investor risk appetites and is therefore a welcomed shift from last quarter,” said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Monday. “If it persists, it will also help the earnings of companies with significant non-U.S. revenue sources.”
Technology stocks in particular may benefit, while the broad S&P 500 index also has significant revenues outside the U.S., according to the note. “The tech sector leads the way here, with 59 percent international sales,” wrote Colas. He said 41% of the S&P 500’s revenues are non-U.S.
The dollar has weakened more in the past two weeks than in the entire first quarter – which was the last time non-U.S. currencies were rallying, according to DataTrek.
“Hopes for an end to Federal Reserve interest rate hikes are fueling the rally in non-U.S. currencies this quarter,” said Colas. “Not only does this reduce the interest rate differentials between domestic and foreign bonds, but it also lessens the likelihood of a global recession.”
Tom Lee, head of research at Fundstrat Global Advisors, also anticipates the weaker U.S. dollar should provide some upside to company earnings. In a note Monday, he recalled that last year’s surge in the U.S. dollar, as the Fed was aggressively hiking interest rates in its battle with soaring inflation, subtracted 5%-7% from earnings-per-share results.
“So this payback should boost results for the next 2-3 quarters,” Lee wrote. The second quarter “will likely be the worst of the EPS comparisons,” he said, expecting “earnings to start comparing favorably next quarter.”
Since the start of the third quarter, “almost all non-US currencies have gained ground on the dollar, and at a quick pace,” according to the DataTrek note.
The ICE U.S. Dollar index
DXY,
which is a measure of the greenback against a basket of six major currencies, is down more than 3% so far this year, FactSet data show. That includes a drop of around 2.9% just this month, based on Monday midday trading. The index was showing a decline of more than 7% over the past 12 months.
The U.S. dollar “is becoming a tailwind,” Lee said in his note, pointing to its year-over-year drop.
Thirty companies have reported second-quarter earnings so far, beating consensus expectations by 6% in aggregate, according to a BofA Global Research note Monday.
“The earnings beat rate is above average at 77% but is weaker than last quarter’s 90%,” BofA equity and quant strategists led by Savita Subramanian said in the note. They expect the 6% beat rate, so far, may narrow to 3% for the second quarter.
U.S. stocks were trading higher around midday Monday, with the Dow Jones Industrial Average
DJIA,
was up 0.2% while the S&P 500
SPX,
rose 0.3% and the Nasdaq Composite
COMP,
gained 0.8%, according to FactSet data, at last check.
The S&P 500 has climbed 17.7% so far this year based on midday trading Monday.
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