Rising tariffs and the weakening dollar are casting a shadow on companies’ profit guidance this earnings season, with more damage seen unfolding over the coming quarters.
Companies across Europe are already sounding the alarm following the dollar’s slide to three-year lows versus the euro and to a 10-year trough against the Swiss franc. That’s another headache for stock markets grappling with the risk of an economic slowdown due to President Donald Trump’s policies on trade.
Given that Stoxx 600 index members get 60% of their sales from overseas, such a large dollar slide is unwelcome, as it would sharply reduce the worth of US earnings once converted back into local European currencies. As a result, US-exposed stocks in the region are falling with the dollar and many investors are turning to domestically-geared firms as an alternative.
Among those flagging the exchange-rate headache is SAP SE, the continent’s most valuable firm. Describing the greenback’s weakness as a medium-term earnings headwind, the software maker’s chief financial officer told investors the hit should become evident next year as currency hedges start to expire.
At Dutch beermaker Heineken NV, meanwhile, the euro’s strength against a range of currencies is expected to curtail this year’s revenue by €1.72 billion ($2 billion). French medical-diagnostics company BioMerieux and British retailer WH Smith Plc also highlighted exchange-rate risks during their earnings reports.
“European companies will have to wake up to the idea that their price competitiveness can no longer rely on a stronger US dollar,” said Florian Ielpo, head of macro research at Lombard Odier Investment Managers.
While the current earnings season won’t capture the effect of tariffs unveiled on April 2, “the third quarter will be the eye of the storm,” Ielpo predicted.
Meanwhile, forecasters expect the trade war to hurt the greenback further and potentially stoke a recession in the US. That’s knocked the S&P 500 8.6% lower so far in 2025, and largely trimmed this year’s advance in European equities.
Each 5% rally in the euro and other local currencies against the dollar shaves 1.5 to two percentage points off earnings growth in the MSCI Europe gauge, Morgan Stanley strategists estimate, describing the currency moves as “a broad-based drag.”
US Impact
The exchange-rate shifts haven’t really hit home in the US yet: The dollar was stronger against the euro in the first quarter than the same period a year ago. But it’s since weakened precipitously, threatening to curb sales as the year goes on. Some forecasters and traders expect the greenback will weaken to $1.20 per euro from about $1.14 now.
For American companies that sell abroad, dollar weakness can be a boon — shares in companies that make most of their sales outside the US, such as Coca Cola Co. and Philip Morris International Inc., have bucked this month’s stock-market rout.
Yet, only a third of revenue for S&P 500 constituents comes from overseas. For the remaining, domestic-focused companies, such as retailers, a falling greenback is usually bad news, because it raises prices for imports and erodes consumers’ purchasing power, UBS Group AG strategists note.
Bloomberg Intelligence analysts George Ferguson and Melissa Balzano single out the US airline sector, noting yields could fall on the lucrative transatlantic travel segment, “as the euro-dollar exchange rate slips out of favor for US passengers.”
“Weaker demand may manifest as early as the third quarter, as some fliers scale back vacation plans based on dollar costs, while the debate about trade has Europeans looking for destinations other than the US,” they added.
Estimate Cuts
As economic gloom deepens, strategists are cutting their earnings estimates for the year. As for the S&P 500, earnings-per-share growth is seen as 7.3%, down from 11.4% at the start of the year, data compiled by Bloomberg Intelligence shows. Meanwhile Europe’s Stoxx 600 earnings growth estimates have been cut to minus 2% from 3% in January, according to Barclays Plc strategists.
Meanwhile, currency-driven earnings downgrades are coming thick and fast in export-led European sectors. Vontobel, for instance, cut its estimates for Richemont, Swatch Group AG and Lindt & Spruengli AG because of the dollar’s depreciation against the Swiss franc. Bank of America Corp. lowered its predictions for German cosmetics maker Beiersdorf AG by 2%, while Barclays slashed profit-growth forecasts for Unilever Plc, Nestle SA and Lindt.
“Focus on domestically driven businesses,” Jacob Falkencrone, global head of investment strategy at Saxo Bank A/S, told clients in a note. “European exporters are fighting a strong euro, eroding profits just as they’re squeezed by tariffs.”
In the US, firms comprising over 60% of the S&P 500 report this week and next, including Microsoft Corp. and Eli Lilly & Co. Some multinationals will, no doubt, welcome dollar weakness, counting on it to cushion exports. Accenture Plc, Alphabet Inc. and Microsoft were among firms named by BNP Paribas Exane as having more than 50% exposure to non-dollar revenues.
Still, many investors remain skeptical, warning that Trump’s trade war could dampen global demand for goods and services.
“US exporters should benefit on the weakness of the dollar but may well suffer from tariffs and anti-US sentiment,” said James Athey, a fund manager at Marlborough Investment Management Ltd. “I think it is hard to make many cases for improved earnings outlooks anywhere.”
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