The soaring US dollar has dimmed the profit outlook for American multinationals such as Amazon and Apple, raising doubts among investors about how long the stock market rally can withstand the strengthening dollar.
The US dollar has risen nearly 7% from its September low and is approaching its highest level since November 2022, posing a threat to large-cap technology stocks. The high valuations of these companies have driven the S&P 500 index to a two-year bull market, fuelled by a surge in profit growth.
Despite the dollar’s weakness due to the US’s delay in imposing tariffs on Canada and Mexico, the demand for protection against further appreciation of the dollar has reached its highest level in two years, driven by President Trump’s economic policies.
Howard Du, a foreign exchange strategist at Bank of America, said, “The unexpected rise of the US dollar is the main reason for the greatest damage to corporate profits.”
In fact, data from Goldman Sachs Group Inc. shows that nearly 40% of S&P 500 companies mentioned “foreign exchange” in their earnings call. Apple expects these unfavorable factors to persist. Although Amazon’s latest quarterly performance was generally good, investors are concerned that the first-quarter earnings guidance was lower than expected, partly due to the significant drag from currency fluctuations. The strong US dollar has reduced the value of export demand and overseas earnings.
Patrick Fruzzetti, portfolio manager at Rose Advisors, said, “Even without tariffs, a strong dollar could seriously hurt these companies and put pressure on some of their businesses.”
When the US dollar rose by more than 25% in mid-2014 and by the same extent again from 2021 to 2022, companies in the S&P 500 index experienced profit recessions. In early 2018, during Trump’s first term, a 10% appreciation of the dollar, coupled with the tariff shock, dealt another blow to profits, and the S&P 500 index subsequently plunged nearly 20% that year.
Paula Cummins, the head of foreign exchange sales at U.S. Bancorp, said that it is widely believed that the U.S. dollar “will remain strong” and “continue to rise until 2025”.
Although stock investors often overlook the negative impact of a strong dollar on earnings, given that stock valuations are near historical highs, they are still keeping a close eye on it. The price-earnings ratio of the index tracked by Bloomberg for the so-called “Big Seven” stocks is 30 times the expected profits for the next 12 months, up from around 20 times at the end of 2022 and far above the 22 times of the S&P 500 index.
With the United States imposing a 10% tariff on all Chinese goods, the Big Seven may face some problems. Ryan Grabinski, director of investment strategy at Strategas, said Tesla has the highest revenue exposure in China, at over 20%, followed by Nvidia and Apple, at around 16%. Only Meta Platforms Inc. has a revenue exposure in Canada of just 2.1%, and none of the Big Seven has a significant exposure in Mexico.
Grabiner said, “From an income perspective, China’s tariffs and any subsequent retaliatory measures are the most worrying for the market.”
Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, believes that tariffs are a risk because multinational companies are now more dependent on the US market than they were when tariffs were first imposed during Trump’s first term.
