US profits set for testing time following oil and dollars shift

Falling oil prices and a surging dollar have led to the largest downgrade of US company profit estimates since the financial crisis.

The energy sector accounts for the bulk of the profit declines on the S&P 500 over the past quarter and concern is mounting about the fast rise in the value of the dollar. The currency has increased 20 per cent over the past year, and put pressure on the revenues of US companies that conduct a large amount of business outside the country.

"The strength of the dollar is the largest headwind for revenue that it has been in 25 years," said Jonathan Glionna, US equity strategist at Barclays. "Not only has the dollar made a dramatic increase, but international sales are now more important than they used to be."

Technology companies are among the most exposed to currency swings, generating more than half of sales outside of the US - more than any other sector.

Analysts at Cantor Fitzgerald warn that Google, Facebook, Amazon and Priceline could face the brunt of the dollar's strength, with the latter at risk of a $1.3bn hit to travel bookings over the year. For Google and Amazon, the figure could surpass $1bn, or a 4 per cent haircut to sales growth.

Early reports from a handful of retailers have raised concerns that the trend will continue into other sectors.

In March, Nike said future order growth - a measure of the coming months' orders for its products - decreased to just 2 per cent. Excluding currency swings, sales growth for the athletic clothing and footwear group would have remained at a double-digit clip. Executives with Walmart, Apple, Tiffany, United Technologies and dozens of other US multinationals say that currency shifts will not abate.

On a per share basis, estimated earnings for the S&P 500 have fallen 8.2 per cent since year end, the largest decline since the first quarter of 2009, according to FactSet.

The energy sector is expected to again be the biggest hit. The price of US crude oil has fallen by half since peaking at more than $100 a barrel last June.

Earnings are expected to drop nearly 5 per cent year-over-year on a sales decline of 2.7 per cent. Excluding energy, earnings are seen rising 3.4 per cent and revenue increasing 3.1 per cent, but that is still down from estimates of 8.9 per cent and 4.7 per cent growth, respectively, as of December 31.

Companies within the S&P 500 earned more than two-fifths of revenues abroad in 2013, the most recent year for which data are available, according to S&P Dow Jones Indices.

FiREapps, a currency consultancy, pegs the cost to fourth quarter sales at $18.7bn for some 215 North American companies, a fourfold increase from the previous three months.

Projecting the effect of changing currency values on company results is particularly tricky, analysts and investors said. While companies may reveal the extent of US versus non-US operations, most do not give granular detail within regions, such as Europe.

Heading into earnings season, which kicks off unofficially with Alcoa on Wednesday, investors have punished US companies with heavy foreign exposure.

The median price change for companies in the S&P 500 this year has been a 0.7 per cent rise, but those that generate less than half of their sales inside the US have fallen 0.5 per cent, FactSet data show.

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