Dollar's rise casts shadow on US earnings

A surging dollar is expected to hit some of the largest US multinationals this week, as more than a fifth of S&P 500 companies report results for a quarter marked by a 9 per cent jump in their domestic currency.

Blue-chip behemoths such as IBM, General Motors, United Technologies, Coca-Cola and McDonald's are among those set to release earnings by Friday.

With the S&P up only 1.1 per cent this year, investors are concerned that several companies could emulate General Electric and Philip Morris, which each said last week that the dollar reduced their revenues by nearly $1bn in the first quarter. GE said currency swings hit profits by $120m, and Philip Morris reported a $585m hit to "operating companies income".

Fears of a new Greek crisis are resurfacing and US economic data has disappointed of late, but corporate earnings are likely to be a key driving force for US equities this year, said Russ Koesterich, global chief investment strategist at Blackrock.

"For 2015, it will come down to earnings and whether companies can overcome a higher dollar," he said.

Earnings reports so far have validated recent concerns over falling energy prices and a rising dollar that have led to the largest downgrade of earnings estimates since the financial crisis.

FactSet expects first-quarter earnings for the S&P 500 to decline 4 per cent and revenues to drop 3 per cent. But it expects both earnings and revenues to be down 10 per cent for companies that generate less than half their sales in the US.

Between the end of October and mid-March, the dollar index - which measures the greenback against a basket of its peers - climbed 15 per cent .

The euro suffered its biggest quarterly decline against the dollar since it was created in 1999, and many strategists hastily brought forward their target date for the dollar reaching parity with its transatlantic partner, although that expectation has been tempered by poor US economic data.

Currency swings are affecting a wide range of multinationals. Delta, the US airline, plans to suspend service to Moscow later this year because of the slide in the Russian rouble, and Tiffany & Co, the venerable diamond retailer, expects tourist traffic in the US to remain under pressure.

Executives at Apple, which reports quarterly figures next Monday, have already warned that sales growth in the three months to the end of March would have been more than $2bn higher if currencies were held constant.

Technology companies are acutely exposed to the dollar's strength, as the sector generates more of its revenues abroad than any other, according to S&P Dow Jones Indices.

Morgan Stanley analysts said the impact of foreign currency rates are "the largest headwind for March quarter earnings" for the tech industry, forecasting a 1 per cent reduction in company guidance.

A mitigating factor for dollar-related pain for companies is that expectations have already been largely reset since the dollar began its sharp appreciation.

"Earnings expectations for the first quarter reflect most of the negative forces facing the S&P 500, and we do not expect material downside to estimates," said Jonathan Glionna, a strategist with Barclays. "Estimates have already been cut by the most since the first quarter of 2009 [and] negative pre-announcements are at a 10-year high."

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