A Weak Dollar Has Added Heft to S&P 500 Earnings. A Flip Could Be Coming.

The weakening dollar will boost second-quarter earnings. (Mark Wilson/Getty Images)

A weakening dollar has provided a solid lift to early second-quarter earnings, but it could be masking softness in domestic demand and potential pressures on profit margins as tariffs increase over the coming months.

The U.S. dollar remains deep in the throes of its worst performance in five decades. The greenback has fallen nearly 9.5% so far this year and is pinned near the lowest levels since 2022 amid a mixture of slowing growth prospects, rising fiscal deficits and worries over the safety of longer term investment in American assets.

The slump, however, is set to deliver a powerful boost to second-quarter S&P 500 earnings. Data from Apollo Global suggests companies within the benchmark generate around 41% of their total revenue from outside the U.S., and a weaker dollar increases their value when it comes to financial reporting.

So, in terms of reported revenue, an item sold by a U.S. company in Europe in June 2024 for 100 euros would translate to around $107. The same item sold last month would generate $118.

The U.S. dollar index, which tracks the greenback against a basket of its global peers, traded in the 104 range over the three months ending in June 2024. It fell from 103 to 97.18 over the second quarter of this year.

With around S&P 500 companies reporting so far, LSEG estimates suggest that collective profits for the entire benchmark are likely to rise by 6.7% over the second quarter.

That’s a percentage point improvement from early forecasts and nearly two percentage points better than the revenue growth forecast of 4%.

Netflix, the streaming services giant, acknowledged the impact of a slumping greenback in its second-quarter earnings update last night. The group told investors that “the majority of the increase in our revenue forecast reflects the recent depreciation of the U.S. dollar vs. most other currencies,” alongside subscriber growth and advertising sales.

PepsiCo also posted better-than-expected second-quarter earnings on Thursday, and said its bullish near-term outlook is supported by the fact that “foreign exchange headwinds have moderated, due to the weakening of the U.S. dollar.”

The drinks and snacks maker, which generates around 40% of its revenue from overseas markets, also saw international markets growing faster than its two domestic businesses.

Industrial bellwether 3M, which posted stronger-than-expected second-quarter earnings on Friday, said the bulk of its improved earnings outlook was linked to the weaker dollar.

The impact could be even more significant for so-called Magnificent Seven megacap techs stocks, the first of which will report earnings next week in the form of Tesla and Alphabet.

FactSet data suggests the Google parent’s overseas sales comprise around 51% of its overall revenue. The estimate for Tesla, based on 2024 data, is similar.

That weakness, however, could turn against companies, and consumers, over the back half of the year.

President Donald Trump has vowed to impose sweeping tariffs on U.S. imports, starting on Aug. 1, that will raise the cost of goods for U.S. companies. A weaker dollar, meanwhile, means they will be paying more for them.

“Dollar weakness—implying that U.S. imports from abroad are more expensive than they would otherwise be—combined with an escalating tariff regime could raise the overall cost of importing goods,” said Monica Gurrea, investment strategist at Morgan Stanley Wealth Management.

“Higher import prices from the twin effect of a weaker dollar and tariffs could result in headwinds for consumers,” she added.

Pressure on the Federal Reserve Chairman Jerome Powell to lower interest rates, alongside threats to remove him before his term expires next year, is also adding downward pressure on the greenback that will exacerbate those twin dynamics.

“For so long, the dollar was this oppressive force on companies that made their money abroad,” said Hardika Singh, economic strategist at Fundstrat.

“Now it has ebbed some, and that is a really worrying sign, especially for the second half of the year…or until we come to our senses and realize that it’s hiding weakness in our own home,” she added.

At present, however, it has to be said that consumers are feeling cautiously optimistic. The University of Michigan’s benchmark reading of consumer confidence improved modestly in July, while its survey of inflation expectations eased notably.

“Despite risks of rising consumer inflation in the next few months, consumers have well-anchored expectations that tariff inflation will be temporary, and that conditions should improve by the time we enter 2026,” said Jeffrey Roach, chief economist at LPL Financial.

Write to Martin Baccardax at martin.baccardax@barrons.com