While tech investors have plenty of issues to worry about as the sector heads into a key week for corporate earnings, one notable headwind from last year has eased in recent months: the dollar.
The dollar has weakened by about 11% against a basket of major currencies from a two-decade peak reached in September, touching its lowest since April. The trend will bolster earnings at companies that derive a greater percentage of their revenue from outside the US, as a weaker greenback means foreign revenue translates into more dollars.
The index was little changed on Monday, while the Nasdaq 100 Index fell 0.9%.
“Currency translations were a big headwind last year, but this fulcrum in the dollar will support earnings and growth,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “As companies look out over the year, they can start to see benefits from where the currency is headed.”
The dollar index had its biggest gain last year since 2015, a byproduct of the Federal Reserve pushing up interest rates in order to combat inflation. The reversal reflects optimism that the central bank could be near a dovish pivot; the yield on the 10-year Treasury, a key factor behind tech valuations, has similarly receded from a recent peak.
The tech-heavy Nasdaq 100 Index is up 6.9% since the dollar index’s peak in September, and it is has risen for four straight weeks to kick off 2023.
The weaker dollar has already been a theme this earnings season. IBM Chief Financial Officer James Kavanaugh told Bloomberg News that the currency will stop weighing on growth this year, with weakness bolstering results in the second half. This was echoed by ServiceNow Inc., which said currency fluctuations probably won’t weigh on annual earnings in aggregate this year, following a year when they curtailed growth by 4.5 percentage points.
The tailwind should be felt across the sector. While UBS Group AG expects Apple Inc. will show iPhone softness when it reports, it predicts this will be offset by foreign exchange trends. Less than half of Apple’s 2022 revenue came from the Americas, per data compiled by Bloomberg.
Research firm Bernstein estimated the stocks it covers will see a revenue benefit of 1.7% to 4.2% this year from the “dramatically weakening dollar,” a trend it expects will act as a cushion as companies report, as it likely isn’t reflected in consensus estimates.
The dollar index remains up about 14% from a 2021 low, and even with the recent retreat, it’s still weighing on some companies. Microsoft Corp., in a conference call last week, said that based on current exchange rates, sales growth this quarter will be about 3 percentage points lower than it otherwise would have been.
A positive outlook on future quarters for many tech companies thanks to the dollar hasn’t overshadowed the fact that this earnings season has already featured some high-profile disappointments, including from Microsoft, Intel Corp., and Texas Instruments Inc. And of course, investors remain attuned to Federal Reserve policy, especially going into the central bank’s policy decision on Wednesday.
“Everyone views it as a tailwind when the dollar weakens, but the thing that’s really on everyone’s mind right now is demand,” said Michael O’Keeffe, chief investment officer at Stifel Nicolaus & Co. “We’re still waiting for the Fed’s lagging effect on demand to kick in. Should something cause the Fed to surprise us, we could quickly see a reversal in the dollar.”
Tech Chart of the Day
The Nasdaq 100 is off to a strong start in 2023, with the tech-heavy index coming off its fourth straight positive week. The index gained 4.7% last week, its biggest weekly gain since November, and the four-week stretch is its longest such streak since August. It is up 10% so far in January, setting it up for its biggest monthly gain since July.
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