S&P 500 Profits Get a Lift From the Crack in King Dollar’s Reign

With the Federal Reserve nearing the end of its most disruptive monetary-tightening campaign in a generation, a softening US dollar is poised to boost profit growth for nearly half of the companies in the S&P 500 Index over the next year.

As speculation grows that the US central bank plans to halt interest-rate hikes soon, traders are wagering that the dollar, which has declined over 10% from a peak in September, could lose more steam. A pullback in the greenback should, in turn, help companies that sell goods overseas and have been vulnerable to rate hikes and the ramifications of a strong greenback.

“The perception that the Fed is near the end of its rate cycle has weakened sentiment toward the dollar — a key risk-on signal for the stock market this year and a boon for Corporate America,” said Michael Sheldon, the chief investment officer at RDM Financial Group. “While corporate profits still need to improve, a weaker dollar is a bullish tailwind for multinational firms that obtain a significant portion of their revenues from overseas.”

Softer Dollar to Boost SandP 500 EPS Growth

What’s more, dollar weakness has room to run after the Fed said this week that further rate increases would be data-dependent, bolstering traders’ hopes that the hikes are near an end.

That sets the stage to support corporate profits in the quarters ahead since roughly 44% of the companies in the S&P 500 have earnings per share that are negatively correlated with the US currency, according to data compiled by Bloomberg Intelligence. That encompasses nine of 11 industry groups in the index, led by sectors including tech, communications, consumer staples and materials, the data show.