If investors look back at how the strong U.S. dollar has influenced stock prices, they may miss opportunities. Though a rising dollar may translate to lower earnings for U.S. companies with significant overseas operations, adopting a more historical perspective can offer investors reassurance and comfort.
Here’s why a strong dollar shouldn’t be a cause for long-term concern.
Dollar Strength: A Headwind for Some Sectors
The appreciation of the U.S. currency can create challenges for domestic companies that rely heavily on international sales. A stronger dollar makes their foreign earnings less valuable when converted back into U.S. currency. Analysts at Bank of America (NYSE:BAC) Global Research highlight that 41% of S&P 500 (SPX) revenue comes from non-U.S. sources. This substantial portion of external revenue would seem to leave companies vulnerable to dollar fluctuations.
However, the impact isn’t uniform across all sectors. DataTrek Research highlights that sectors like financials tend to have lower exposure to international revenue, mitigating the negative effects of a strong dollar.
Strong Dollar Fails to Stifle Tech and Growth Sectors
An interesting observation from DataTrek Research is that the top-performing sectors of the S&P 500 this year – communication services, technology, and energy – all have above-average international revenue.
This suggests that strong company fundamentals and positive investor sentiment can outweigh the headwinds of a rising dollar.
Dollar Strength Doesn’t Hinder Stocks
While a weaker dollar might be preferable in the short term for enhancing earnings, historical trends indicate that a stronger dollar doesn’t necessarily pose a long-term roadblock for U.S. stocks.
This becomes even less worrisome when we see that DataTrek Research demonstrates that a strong dollar has been the dominant trend for nearly two decades. Remarkably, this trend hasn’t hindered the growth of U.S. stocks or corporate cash flow. In fact, large technology stocks, a major driver of recent market gains, have thrived during this period of dollar strength.
Key Takeaway
The recent rise in the U.S. dollar may cause some short-term earnings fluctuations for certain companies, but investors shouldn’t be overly concerned. Historically, a strong dollar hasn’t hampered the overall performance of the U.S. economy.
