Daily Management Review

U.S. profit Picture Could be Helped by Dollar's Sudden Weakness, say Analysts


02/05/2017




U.S. profit Picture Could be Helped by Dollar's Sudden Weakness, say Analysts
The suddenly limp U.S. dollar is something that stock investors could have at least one less worry in the next earnings period.
 
A sharp reversal since the start of the year has been witnessed in the greenback, whose strong rally after the Nov. 8 U.S. election hit profits at many U.S. multinationals in the fourth quarter. The picture for the current quarter could be shifted by the comments suggesting that the Trump administration favors a weaker currency.
 
Helping provide a buffer to some of the uncertainties facing investors, including the new U.S. president's policies and mostly beating Wall Street's expectations are the fourth-quarter results, even with the dollar's drag.
 
According to Thomson Reuters data, on track to be the strongest since the third quarter of 2014, and up from 6.1 percent forecast at the start of January, the year-over-year profit growth for the fourth quarter is now estimated at 8.0 percent with earnings in from more than half the S&P 500 companies. A rise of 11.5 per cent in first quarter earnings was was first expected by analysts.
 
That "sets the stage for a stronger Q1, particularly when you look at the jobs numbers coming out and when you look at the business confidence surveys and consumer confidence surveys. There's a lot of improving sentiment," said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.
 
In four months in January, U.S. nonfarm payrolls had the largest increase.
 
"Even as the companies are talking their expectations down, consumers and businesses are likely to act on that better sentiment."
 
Putting in a decline of 2.6 percent for January after gaining 7.1 percent in the last quarter of 2016, the dollar index .DXY on Jan. 31 posted its worst start to a year in three decades.
 
The administration is prepared to jettison two decades of "strong dollar" policies advocated by predecessors, suggested  comments this week by President Donald Trump and a top economics adviser.
 
Since it makes U.S. multinationals' foreign currency earnings worth less in dollars, a strong dollar is a worry for equity investors. According to S&P-Dow Jones Indices, nearly half of S&P 500 sales come from overseas.
 
The strong dollar as a negative in their fourth-quarter reports and also concern about its effect on 2017 results was cited by executives from a slew of U.S. companies.
 
Despite its upbeat fourth-quarter results, among them was Apple that gave a cautious outlook for the current quarter that it mainly attributed to the strong dollar.
 
"For a company like ours where we do about two-thirds of our business outside the United States, the strong dollar presents a headwind of more than 2 percent growth," Apple Chief Financial Officer Luca Maestri said.
 
Other companies including Procter & Gamble, Mead Johnson Nutrition), 3M Co and PPG Industries cited currency hurdles for the last quarter or for 2017.
 
Sales growth could be cut by two to three percentage points for fiscal 2017 due to the combined headwinds of foreign exchange and minor brand divestitures, expects Procter & Gamble.
 
Especially given expectations for interest rate hikes for this year, but that earnings should still benefit from an improving economy, some strategists say the dollar is still likely to be stronger rather than weaker this year.
 
"You should get more than enough growth from the economy if you're a corporation to more than offset the rise in the dollar," said Sameer Samana, global quantitative strategist for Wells Fargo Investment Institute, which expects the dollar index to rise 7 percent by year end.
 
(Source:www.reuters.com) 






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