by Sagarika Jaisinghani
A rallying dollar is likely to drive a big divide in Corporate America’s earnings scorecard this season, with domestically oriented sectors outshining those with large international revenues, according to Morgan Stanley strategists.
The greenback has surged since Donald Trump’s November presidential election victory on expectations that his tax and tariff policies could stoke inflation. A resilient US economy has also fueled wagers that the Federal Reserve could keep interest rates higher for longer, further boosting the currency.
The team at Morgan Stanley, led by Michael Wilson, said a stronger dollar typically leads to a wider range of performance across the S&P 500 Index as its constituents derive less than 30% of sales internationally. He identified household products, technology hardware and food and beverage stocks as having the biggest foreign exposure, while telecom services and utilities are least at risk.
“We think dollar strength may be a key contributor to higher performance dispersion across the market this earnings season,” Wilson wrote in a note. The strategist said he expects the recent underperformance of sectors more tied to the greenback to continue.
Still, Wilson said the performance of the S&P 500 as a whole could remain resilient “as long as robust domestic growth is the main driver of dollar upside.” The strategist capitulated on his long-held bearish view on equities in mid-2024.
The rally in US stocks has faltered in the new year as bond yields surged on a more hawkish Fed policy outlook. With the 10-year Treasury yield approaching the key threshold of 5%, investors and strategists have warned there could be further pain in store for equities.
While analysts have reduced earnings estimates heading into the fourth-quarter reporting season, Wilson said expectations remain high relative to recent quarters, raising the bar for companies to beat projections.
His counterpart at Goldman Sachs Group Inc., David Kostin, also said he expects the magnitude of earnings beats to “moderate” this season.
Copyright Bloomberg News
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