Weaker US dollar adds to optimism over US earnings

[NEW YORK] The US dollar's drop to three-year lows this week after prolonged weakness in 2017 is expected to further boost profits at big US companies when investor optimism is already high over corporate tax cuts.

Investors are keeping an eye out for signs of the US dollar's impact on company earnings as fourth quarter reporting ramps up next week.

US multinationals, especially energy and technology companies that have a significant portion of their sales overseas, could benefit the most from the currency effect, while other sectors like telecommunications benefit less.

The greenback was headed for its fifth week of losses on Friday. The US dollar index's average in the fourth quarter fell about 6 per cent from its average in the year-ago quarter.

Its nearly 10 per cent fall in 2017 was its worst annual performance since 2003.

The US dollar has fallen on expectations central banks besides the Federal Reserve are seeking to end their policy of ultra-low, even negative, rates adopted to combat the 2008 global financial crisis. Analysts said that if US inflation remains below the Fed's target, while overseas central banks raise rates and reduce bond purchases, the US dollar could fall further.

Though it is still early days in the fourth-quarter earnings season, there are examples of how the weak US dollar is affecting companies' bottom lines.

International Business Machines late Thursday cited a currency boost in its results. IBM's sales rise of 3.5 per cent last quarter would have been only 1 per cent if currency impact were excluded. American Express, also on Thursday, said fees and commissions grew 17 per cent and 12 per cent on a currency-adjusted basis, noting that "the weaker US dollar had a larger impact on this line."

The effects may not be as headline grabbing as those from the changes to the US tax law that were enacted last month by US Congress and President Donald Trump.

Changes to the law, which are prompting many companies to take one-time charges in fourth-quarter reports, include a cut in the corporate income tax rate to 21 per cent from 35 per cent.

The expected boon to earnings has helped stocks rally so far this year, while the weak US dollar has added to the enthusiasm.

"You look at the big-cap stocks and with that weakening US dollar, that just makes everything so much better for them as far as overseas," said Peter Costa, president at Empire Executions Inc in New York.

A weaker US dollar likely added about 50 basis points to fourth-quarter earnings growth, Credit Suisse strategists wrote in a note. Analysts are forecasting earnings for all S&P 500 companies of 12.4 per cent in the fourth quarter from a year ago, according to Thomson Reuters data.

The US dollar's weakness had also helped third-quarter results.

Among other companies that have cited currency benefits in reports since the start of December are John Wiley & Sons, Progess Software and Actuant.

"If you couple global demand with a weaker US US dollar, it's a positive underpinning for the industrials in particular," said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

US-based multinationals can benefit the most from declines in the US dollar, which makes overseas sales more valuable when translated back into US currency. Global economic demand continues to pick up and was one of the biggest boosts to earnings in 2017, strategists said.

S&P 500 companies with 50 per cent or more of sales coming from outside the United States have estimated profit growth of 15.2 per cent for the fourth quarter, compared with 12.3 per cent for companies with less than 50 per cent of non-US sales, according to Thomson Reuters data.

REUTERS