Corporate earnings under pressure from almighty US dollar - Stock Market News

On Tuesday, the August US CPI inflation print surprised markets to the upside, despite expectations that the declining energy prices could offer some relief. These signs that inflationary pressures are broadening spurred bets that the Fed could proceed with a more aggressive monetary tightening path, which will most likely extend the greenback’s outperformance in the forex sphere. Hence, what does that mean for US companies’ earnings, especially for those with large exposure to foreign markets?

Strong dollar wipes off earnings

At the beginning of the week, Oracle announced its latest earnings report, citing that the persistently strong dollar has largely weighed on the firm’s financials. This statement attracted investors’ attention ahead of the upcoming Q3 earnings season, which is also expected to provide clear evidence on how high inflation combined with monetary tightening have impacted profit margins.

In the last couple of months, many US corporate giants have been repeatedly stating that the king dollar, which has appreciated almost 16% year-to-date against a basket of currencies, has been inflicting significant damage on revenues received in foreign currencies. This impact is magnified for US firms whose production takes place domestically, thus input costs are paid in dollars.

Therefore, considering that the vast majority of firms listed on the S&P 500 index produce around 50% of their revenue abroad, will ‘solid sales but disappointing profits’ be the major theme in the next earnings season?

Macro conditions hint towards acceleration of the trend

Should the dollar’s surge end soon, its outperformance so far in the year would be enough to prompt further downgrades to earnings projections only attributed to foreign exchange devaluation. Nevertheless, the latest US CPI came out at 8.3% on an annual basis above expectations of 8.1%, reinforcing that there is a long way to go until inflation gets under control.

Moreover, the so-called core CPI, which excludes the volatile food and energy components, accelerated 0.6% from July and 6.3% from a year ago, indicating that the energy crisis is not the sole driver behind inflation since prices continue to rise across a wide range of goods and services. This latest data point triggered bets for a 100 basis points hike by the Fed at the September meeting despite fears that such an aggressive move could sink the economy into a recession. All in all, the greenback’s dominance will most likely resume as it would gain on both interest rate differentials and attract safe haven flows stemming from recession fears.

Apple attempts to hedge forex losses

Apple’s revenue and earnings are highly dependent on the sales of its products in foreign markets. Ahead of the iPhone 14 launch, consumers were positively surprised by the firm’s decision to not increase the new model’s price relative to the older version in the US, which led to a significant demand volume. On the other hand, Apple hiked the price of its newly-launched product in Europe to compensate for the devaluation of the euro against the dollar. This new pricing policy could eventually backfire on the enterprise as the increasing prices in Europe are not likely to be well-received by the already inflation-squeezed consumer,  potentially triggering a decline in international sales.

Will those measures boost Apple share?

Taking a technical look at Apple, we can see that despite the price's recent consolidation, the ascending 50-day simple moving average (SMA) is closing the gap with the 200-period SMA, where a potential violation could ignite a fresh rally.

Therefore, if Apple’s pricing policy regarding the new iPhone model succeeds, the bullish cross will be completed, sending the price to test the 164.50 mark.

On the flipside, a decline could initially halt at the recent low of 153.00.

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