Last fall, the US Dollar rose after the election and many pundits worried about the effect of the rising dollar on corporate earnings from abroad. Treasury Secretary Mnuchin advocates a strong dollar over the long term which is a policy that has been in place for more than two decades. Here are his thoughts:
For longer-term purposes, an appreciation of the dollar is a good thing and I would expect longer term, as you’ve seen over periods of time, the dollar does appreciate. In the short term, there are certain aspects (of a strong currency) that are positive about the dollar for our economy and there are certain aspects that are not as positive.
With data improving in Europe and the French Election easing worries about the euro, the dollar has fallen steadily so far in 2017. This is good news for corporate profits as it creates a potential big boost for profits of global-oriented US companies. Three factors "are conspiring for a 'honeymoon period' for overseas earnings," said Sean Darby, chief strategist at Jefferies.
1. The dollar is weakening as Fed rate hike assumptions are pushed out and as political uncertainty in the U.K. and Europe recedes.
2. Earnings revisions in Europe and parts of EM are accelerating faster than the U.S.
3. Concerns over protectionism are fading at the same time as global trade is rebounding.
Bullish on earnings
We have been bullish on S&P earnings since last summer and we remain bullish on the outlook for the rest of the year. The weakening US dollar will only add fuel to the fire and push earnings growth higher. With most of the S&P 500 reported for the first quarter, total earnings are up 13.4% year over year and revenues are up a healthy 7.3% (as per Zacks research). Estimates for the second quarter have come down since the start of the quarter, but that is typical and the magnitude of the negative revisions compares favorably to other recent periods.