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Upside to dollar fears: Lowers bar for 1st-quarter profits

Upside to dollar fears: Lowers bar for 1st-quarter profits

A stronger dollar means weaker earnings for big U.S. companies that do a lot of business abroad. But there’s a chance analysts slashed profit estimates too much — which could be bullish. An emerging story on Wall Street is how much analysts have slashed first-quarter profit projections for the broad Standard & Poor’s 500-stock index. Heading into Monday’s trading, analysts were forecasting a 3.1% contraction in profits, which is well below the 5.3% growth expected on Jan. 1. That has raised fears that stocks may run into some headwinds in coming weeks and months, despite the fact that the Federal Reserve is likely to hold off on a June interest rate hike as feared.american-dollars

But all the bad news on earnings may be overdone, which could add up to good news for the stock market, said Todd Salamone at Schaeffer’s Investment Research. Ever since the Fed statement and Chair Janet Yellen’s press conference last Wednesday, the surging dollar has cooled.

And if the dollar has peaked, that could be a positive for stocks, because it could mean that analysts got too pessimistic on the earnings outlook for U.S. multinationals. “Might lower earnings expectations work in favor of the bulls, in terms of a lower bar to hurdle when earnings season rolls around again?” Salamone asked rhetorically in a client note Monday. “Just as analysts scrambled to reduce earnings estimates due to a surging dollar,” added Salamone, “there is the possibility that perceived dollar headwinds are ‘overly’ factored into earnings estimates, a potentially bullish underpinning in the months ahead.”

And don’t forget that many hedge-fund managers have moved out of U.S. stocks and into Japan and European equities, he adds. “If dollar weakness continues, these same managers may move back into U.S. stocks,” Salamone theorized.

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