Market momentum is Yellow. Money has remained largely on the sideline, but Goldman Sachs (GS) earnings report helped push a lot of capital into the markets this morning. Be patient. Opportunities will come. Look to American Express (AXP) as an opportunity.
On Friday, I explained the impact of a rising dollar on emerging markets. Today, I want to talk a bit more about how the strong greenback impacts American companies with exposure abroad. It’s not that complicated…
Let’s say that a company generates 50% of its revenue in the U.S. and 50% of its revenue in Europe. If the currency value of the local currency declines over a year, it must convert that money back at a higher exchange rate in the U.S.
So, even though the business remains the same from 2021 to 2022, a 15% drop in currency value in the Euro will hurt its international profits. Its profits decline due to the impact of foreign exchange. I want to show you the top companies facing forex challenges in 2022.
Talking The Broad Market
In 2021, international sales accounted for 29% of the $14 trillion in total revenues for S&P 500 companies. That figure increased from 28% the year prior. Around the globe, the Asia-Pacific region represents 9% of non-US revenues for these firms. Europe represents 6%. And 3% come explicitly from China, according to Goldman Sachs. These are considered… the growth markets.
In April, S&P Global conducted a recap of earnings growth among companies in the S&P 500 index. Surprisingly, companies that generated more than 50% of their revenue from nations abroad, these firms had earnings growth of 13.5%. This is long before cuts to global growth expectations, concerns about a U.S. recession, and the dollar’s outrageous surge in May and June.
If not for those three companies – the blended growth rate would fall to about 5.1%, according to S&P analysis. But, if you haven’t noticed, Chevron and Exxon remain under pressure due to falling oil prices… for now.
Companies With the Most Exposure
The U.S. dollar’s rally is the strongest we’ve witnessed in more than 15 years. As a result, the Invesco DB Dollar Bullish Index (UUP) has cracked $29.00 per unit. It has shattered the previous move for the UUP that happened in the wake of the COVID-19 crash and hit its highest levels since the inception of the ETF.
Naturally, an overheated U.S. dollar will affect companies with the most exposure abroad. Goldman Sachs (GS) analysis shows that several technology giants and materials firms have a LOT of exposure abroad. According to a recent study, the following companies are overexposed:
- Qualcomm (QCOM) at 96%
- Schlumberger (SLB) at 85%
- Aflac (AFL) at 70%
- Netflix (NFLX) at 59%
- Meta Platforms (META) at 59%
- Alphabet (GOOG) at 54%.
Check Out This Chart
I own a small business in the United States and consult for several others. One of the most important surveys that I follow is the optimism outlook among small businesses. The National Federation of Independent Business conducts a monthly analysis of economic expectations for the future. There’s never been a projection like this before.
We’re at -61%, lower than the recessionary expectations for 1989, 2001, and 2008. We’re still in the very early innings of this economic downturn. This is just one chart that has really made my eyes pop as we head into the fall when markets are typically the most volatile. Let’s look at some more data tomorrow. More importantly, let’s find ways to profit from it in the weeks ahead.