Several S&P 500 companies have reported that the strong US dollar is hurting their financial performance.
The primary impact from the strong dollar is on revenue, as sales in foreign currencies contract as these sales are converted to dollars.
But the impact to profits in the second quarter will be flat in 2015, and less than the impact to sales, according to Goldman Sachs.
“Overall, profit margins are likely to end 2014 lower than a year before, a consequence of dollar appreciation, a lack of productivity growth, lower financial profits, and higher effective tax rates,” Goldman’s Jan Hatzius wrote in a note Monday.
“But we expect margins to hold roughly steady this year, with stronger foreign demand providing an offset to the stronger dollar, and a healthier rebound in productivity offering potential upside.“
Profit margins won’t collapse because US companies are hedging a lot more, or reducing the impact of currency moves. Also, US companies are boosting their production abroad, and the lower cost of doing production redeems weaker revenues, according to Goldman.
The worst-case scenario is for S&P 500 profits to fall by 2.5%, Hatzius wrote.
As of Friday, 78% of companies had reported earnings above the mean estimate, according to FactSet. The year-over-year earnings growth rate stood at 3% on Monday, up from 1.1% forecast at the start of this earnings season, according to the Wall Street Journal.
More broadly, Hatzius said the strong dollar is likely to have a limited effect on the US economy because at 13.5%, exports are not a huge percentage of GDP. Comparatively, for S&P 500 companies, foreign sales make up nearly 35% of total sales.
Here’s the chart of the trade-weighted dollar index, which has been on a huge tear.
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