Key to the U.S. earnings season: A stronger dollar will lead to "significant differentiation" in corporate profits

Wallstreetcn
2025.01.13 23:54
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Wilson stated that industries focused on the domestic market will outperform those reliant on international revenue. Among the S&P 500 constituents, 30% of sales depend on international markets. The overseas market share is largest in industries such as household products, technology hardware, and food and beverages, while the telecommunications services and utilities sectors are least affected

Due to strong non-farm payrolls reducing traders' bets on Federal Reserve rate cuts, the US dollar index surged past 110 today, reaching a new high since November 2022. As the dollar rises sharply, the earnings season for US stocks is about to begin, and Morgan Stanley's chief strategist Michael Wilson stated that this time may be different.

Wilson noted that a strong dollar will lead to "significant divergence" in US corporate earnings, with industries focused on the domestic market outperforming those reliant on international revenue.

Specifically, a strong dollar typically results in greater performance disparities among S&P 500 constituents, with 30% of sales dependent on international markets. The overseas market share is largest in industries such as household products, technology hardware, and food and beverages, while the telecommunications services and utilities sectors are least affected.

Wilson also stated:

"We believe that a strong dollar could be a key factor in the significant divergence in market performance this earnings season. The recent underperformance of industries closely tied to the dollar is expected to continue."

However, Wilson also mentioned that as long as the main driver of the dollar's rise remains strong domestic growth in the US, the overall performance of the S&P 500 index may still remain resilient.

Although analysts have lowered earnings expectations for the fourth quarter earnings season, Wilson believes that relative to recent quarters, market expectations remain high, which increases the difficulty for companies to exceed expectations. Goldman Sachs' chief US equity strategist David Kostin also stated that he expects the magnitude of earnings surprises this season to "trend towards moderation."

Additionally, it is worth noting that Wilson abandoned his long-standing bearish view on the stock market in mid-2024. This year, as the Federal Reserve's policy outlook has become more hawkish and bond yields have soared, the upward momentum of US stocks has slowed. Especially as the yield on the 10-year US Treasury approaches the critical threshold of 5%, investors and strategists warn that the stock market may decline further

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