Strong U.S. Dollar Could Pressure S&P 500 Earnings, ETFs

The quickly appreciating U.S. dollar could begin to weigh on corporate earnings, especially among large-cap S&P 500 stocks and related exchange traded funds with significant overseas exposure.

The SPDR S&P 500 ETF (SPY) , which tries to reflect the performance of the S&P 500 index, has increased 11.5% over the past year but is down 1.9% year-to-date.

The stronger USD is expected to diminish profits for large companies that do business overseas, and some strategists contend that the strengthening currency and low energy prices could constrain quarterly S&P 500 earnings growth to just 3%, compared to previous calls for a 7% rise at the start of October, reports Eric Platt for Financial Times.

The PowerShares DB U.S. Dollar Index Bullish Fund (UUP) has increased 13.1% over the past year and rose 2.6% year-to-date. [King Dollar ETFs are Quite Royal in January]

The appreciating greenback, which has been rallying against a basket of foreign currencies since July, could pressure the S&P 500 where foreign sales make up over two-fifths of total turnover, with 261 companies in the index generating over 15% of revenues overseas.

Deutsche Bank calculates that for every 10% increase in the USD against major currency baskets, the S&P 500 earnings face a potential decline of “slightly over $ 2,” or each 10 cent drop in the euro from about $ 1.2 could cut $ 1 from S&P 500 earnings.

“The uncertainty in commodities, foreign exchange and interest rates across the curve is high, confounded by uncertainty in quantifying their influence on earnings per share and price-earnings,” David Bianco, strategist at Deutsche, said in the FT article. “We expect more cuts during fourth-quarter earnings season, especially for those with FX exposure.”

For instance, GameStop (NY:SE GME) has already blamed the “strength of the US dollar” for part of its slide in holiday same-store sales.

On a sector-by-sector basis, observers believe the technology, materials and energy sectors will likely be the most affected by a stronger dollar as each sector generates over half of revenues abroad.

Year-to-date, the Technology Select Sector SPDR (XLK) fell 5.0%, Materials Select Sector SPDR (XLB) decreased 1.5% and Energy Select Sector SPDR (XLE) dipped 2.4%.

Cantor Fitzgerald analysts have warned that companies with “material international exposure,” such as Google (GOOG), Facebook (FB), Amazon (AMZN) and eBay (EBAY), could report reduced earnings forecasts if the “trend is sustained.”

XLK includes GOOG 6.4%, FB 4.0% and EBAY 1.6%. SPY holds GOOG 1.6%, FB 0.9%, AMZN 0.6% and EBAY 0.3%.

SPDR S&P 500 ETF

For more information on the S&P 500, visit our S&P 500 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.