The S&P 500, a prominent stock market index, stands to benefit from the recent softening of the U.S. dollar, as noted by market analysts. This shift in currency dynamics signals positive news for global investor risk appetites and is viewed as a welcomed change from the previous quarter.
Nicholas Colas, co-founder of DataTrek Research, emphasizes the significance of a weaker dollar for companies with substantial revenue sources outside of the United States. He explains that if this trend persists, it will likely boost the earnings of such companies, including those within the technology sector. Colas highlights that technology stocks have a notable 59% of their sales originating from international markets.
Moreover, Colas points out that non-U.S. revenues also play a crucial role for the broader S&P 500 index, accounting for 41% of its total revenues.
The decline in the U.S. dollar over the past two weeks surpasses that of the entire first quarter, a period when non-U.S. currencies experienced a rally. DataTrek reports that hopes for the cessation of Federal Reserve interest rate hikes are driving this rally in non-U.S. currencies during the current quarter. Colas highlights that this development not only reduces interest rate differentials between domestic and foreign bonds, but also lessens the likelihood of a global recession.
Supporting this viewpoint, Tom Lee, head of research at Fundstrat Global Advisors, suggests that the weaker U.S. dollar will positively impact company earnings. Lee refers to last year's surge in the dollar, resulting from the Federal Reserve's aggressive interest rate hikes to counter rising inflation, which led to a 5%-7% decline in earnings per share.
In summary, analysts predict that a softening U.S. dollar will have a favorable effect on the S&P 500 index and companies with significant non-U.S. revenue sources. This trend offers potential benefits to various sectors, particularly technology, and reduces the risk of a global economic downturn.
Boosted Results Expected for Next 2-3 Quarters: A Promising Outlook
The upcoming quarters are anticipated to witness a significant boost in results, according to expert predictions. Lee, a renowned market analyst, suggests that the second quarter may be the least impressive in terms of earnings per share (EPS) comparisons. However, he confidently mentions that the subsequent quarter will mark a favorable shift in earnings.
Non-US Currencies on the Rise
Since the beginning of the third quarter, non-US currencies have been gaining ground against the dollar at a rapid pace. In a recent DataTrek note, it was highlighted that almost all major non-US currencies have witnessed significant growth.
Greenback Takes a Step Back
The ICE U.S. Dollar index, which gauges the performance of the dollar against a basket of six major currencies, has experienced a decline of over 3% this year. The latest data from FactSet reveals a 2.9% drop in the index this month alone. Over the past year, the index has declined by more than 7%.
This devaluation of the U.S. dollar is seen as a favorable trend, as highlighted by Lee in his note. He views it as a tailwind due to its year-over-year depreciation.
Strong Earnings Reports But Slightly Below Last Quarter
As of Monday, 30 companies have reported their second-quarter earnings figures, surpassing consensus expectations by an average of 6%. BofA Global Research notes that the earnings beat rate currently stands at an above-average level of 77%, but it falls slightly short of last quarter's impressive 90%. They project that the current beat rate could potentially narrow down to 3% for the second quarter.
US Stocks Display Strength
As per FactSet data at the time of writing, U.S. stocks showed positive growth during midday trading on Monday. The Dow Jones Industrial Average (DJIA) recorded a 0.2% increase, while the S&P 500 rose by 0.3%, and the Nasdaq Composite gained an impressive 0.8%.
Ongoing Success of the S&P 500
Based on midday trading figures from Monday, the S&P 500 has demonstrated remarkable resilience throughout the year, delivering a gain of 17.7%.
The future appears promising for the coming quarters, with expectations of improved results, significant currency movements, and an overall positive trend in the stock market.