A Blog by Jonathan Low

 

Oct 12, 2022

Why Tech Investors Face New Challenge From Strong Dollar

Tech companies derive 58% of their revenues from countries outside the US. That makes tech the industry with the greatest exposure to falling global currencies as sales denominated in those currencies are then worth less. 

Lower earnings may result from this additional challenge to tech companies, thus impacting investors even more in the near term. JL 

Akane Otani reports in the Wall Street Journal:

Large technology companies generate 58% of their revenue outside of the U.S.—the highest share of the S&P 500’s 11 groups. That makes them particularly vulnerable to fallout from the surging dollar. When the dollar strengthens, sales that companies earn in nondollar currencies are worth less. That can shave millions of dollars off company earnings. The speed and scale of the dollar’s gain this year has also compounded investors’ pain. Historically, every 8 to 10 percentage points the dollar gains against other currencies shaves off about 1 percentage point from U.S. earnings growth.

Technology stocks are having their worst stretch in decades. Upheaval in the currencies market might make the rout even worse.

Large technology companies generate 58% of their revenue outside of the U.S.—the highest share of the S&P 500’s 11 groups, according to FactSet. That makes them particularly vulnerable to fallout from the surging dollar. When the dollar strengthens, sales that companies earn in nondollar currencies are worth less. That in turn can shave millions of dollars off company earnings.

Microsoft Corp., MSFT -1.68% which in July reported its slowest revenue growth since 2020, warned that it believes the stronger dollar will shave five percentage points off its revenue growth for the following quarter. Google parent Alphabet Inc. GOOG -0.67% and Facebook META -3.92% parent Meta Platforms Inc. have also said currency fluctuations will likely hurt their results in the coming earnings season.

All three companies are expected to post quarterly results later this month.

“If we think about the list of things that have gone wrong for tech this year, [the dollar] is just the icing on the cake,” said Denny Fish, a portfolio manager who manages Janus Henderson Investors’ global technology and innovation strategy.

Technology stocks jumped with the broader market in the first two days of the week but remained down considerably for the year. The tech-heavy Nasdaq Composite was down 32% for the year through Friday and suffered its worst first nine months of a year since 2002, according to Dow Jones Market Data. The Nasdaq has also fallen for three consecutive quarters, its longest losing streak since the three quarters through March 2009.

“We’ve had inflation, rising rates, everyone expecting the economy to slow materially and now we have this currency headwind,” Mr. Fish said.


In the past, investors have sometimes been willing to look past fluctuations in the currency market because other factors, like a growing economy, have helped offset the drag from a strong dollar. For instance, the dollar soared in 2014 after investors bet the Federal Reserve would soon resume raising interest rates for the first time since the global financial crisis. U.S. stocks nevertheless finished the year higher, too. The reason the dollar was surging was because the U.S. economy—unlike economies in the eurozone and Japan—was looking strong enough for the Fed to consider raising rates from near zero. A robust economy typically makes for good corporate profits.

What makes this year different is that the U.S. dollar is rising at a time when economists widely expect growth to slow materially—both outside and inside the U.S. Economists surveyed by The Wall Street Journal in July estimated the probability the U.S. would be in recession within the next 12 months was 49%. That was the highest share since the depths of the Covid-19 pandemic in July 2020. 

The speed and scale of the dollar’s gain this year has also compounded investors’ pain.

The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is up 16% for the year through Friday.

Historically, every 8 to 10 percentage points the dollar gains against other currencies shaves off about 1 percentage point from U.S. earnings growth, said Jonathan Golub, chief U.S. equity strategist and head of quantitative research at Credit Suisse.

The combination of slowing growth, rising interest rates and a stronger dollar help explain why so many technology stocks have slumped to multiyear lows in the past few months, said Nicholas Colas, co-founder of DataTrek Research.

Microsoft and chip maker Nvidia Corp. both traded Friday at around their lowest levels since March 2021, while Alphabet was at its lowest level since February 2021 and Meta was at its lowest level since early 2019.

“It’s all hitting the fan at once,” Mr. Colas said.

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