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Tiffany said Friday that sales fell 1% in the January quarter but would have risen 3% if not for currency moves. Photo: Getty Images
By
Dan Strumpf
March 22, 2015 5:21 p.m. ET
The soaring dollar is crunching profits at giant U.S. multinationals, prompting Wall Street analysts to make their deepest cuts to earnings forecasts since the financial crisis and boosting the appeal of smaller, domestically focused companies.

The dollar has jumped 12% in 2015 against the euro and is up 27% from a year ago. The WSJ
Dollar Index, which measures the dollar against a basket of currencies, is up 5.3% this year. The dollar’s surge against the euro has been driven by an aggressive European Central Bank monetary-easing program that has come as the U.S. central bank is preparing to raise interest rates.
The soaring dollar is cutting into earnings at U.S. multinational corporations. WSJ's Dan Strumpf reports on MoneyBeat. Photo: Getty
Analysts, citing the dollar’s strength as a key factor, are predicting that profits at S&P 500 firms for the first quarter will show their biggest annual decline since the third quarter of 2009.
As a result, investors are keeping a continued bias toward U.S.-based stocks that do less business abroad, such as shares of small companies that tend to be more domestically focused, and on companies outside the U.S. that stand to benefit from a weakening of their home currency as the dollar strengthens, particularly European manufacturers.
“What is remarkable is the speed with which the dollar has accelerated, and that speed brings with it some complications,” said Anwiti Bahuguna, senior portfolio manager on Columbia
Management’s global asset allocation team, which oversees $68 billion. “The dollar strength is moving at a much, much faster pace than you’ve seen in history.”

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Many investors say the dollar’s rise is behind the relatively strong performance of smallercompany stocks, which are often more domestically focused than large-company stocks. The
Russell 2000 index of small-capitalization shares is up 5.1% this year and 10% in the last six months. That compares with gains in the S&P 500 index of 2.4% in 2015 and 4.9% over six months.
The dollar’s jump has come as the ECB embarked on a new, aggressive easing of monetary policy. Investors expect the Fed to respond to a healthier U.S. economy by raising rates later this year, though many analysts are expecting later, slower increases following Wednesday’s dovish
Fed policy statement.

The complications of dollar strength have been visible in corporate profit reports.
On Friday, Tiffany said sales fell 1% in the January quarter but would have risen 3% if not for currency moves. It expects “minimal growth” in earnings this year, in part due to the stronger dollar. Oracle said Tuesday that net income would have risen 7% in the February quarter if not for dollar strength. Instead, it fell 3%.
“This is the most significant fiscal-year currency impact we have ever incurred,” Jon Moeller, chief financial officer of Procter & Gamble , told investors in late January. The consumerproducts maker expects currency swings to curb after-tax profits by $1.4 billion, or 12%, this fiscal year, ending in June.
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Corporate managements have been caught off guard by the speed of the dollar’s rise, said Brian
Lazorishak, portfolio manager of the $103 million Chase Growth Fund. “If you have a gradual move, it’s easier for managements to adjust to, to prepare for, to hedge if they want to.”
Mr. Lazorishak has reduced his position in shares of Microsoft , which generates half of its sales overseas. He has bought shares of Southwest Airlines , which draws less than 2% of its sales from overseas, and other firms that are more U.S.-focused.
Karl Schamotta, director of currency research at Cambridge Global Payments, a Toronto firm that helps corporations employ strategies in the currency market to protect foreign revenues from currency swings, is telling clients to prepare for the value of one euro to fall to parity, or $1. A euro was buying $1.0821 late Friday in New York.
“Many large firms…are now trying to recover exchange-rate-related losses,” he said.
Against this backdrop, analysts are slashing profit forecasts. Back in September, analysts expected S&P 500 profits to grow at 9.5% in the first quarter from a year earlier and at 11.6% for all of 2015, according to FactSet.
Today, analysts expect first-quarter profits to fall by 4.9%. For all of 2015, profits are expected to grow just 2.1%.
The last time analysts cut their outlook on annual profit growth by that scale was in the six months leading to March 2009, according to FactSet, as stocks were tumbling to their crisis-era lows. And should profit growth come in at the 2.1% rate for all of this year, it would be slowest pace of earnings growth since profits shrank 7.9% in 2009.
David Kostin, chief U.S. equity strategist at Goldman Sachs Group Inc., said that when the dollar has rallied in the past, consumer-discretionary and consumer-staples stocks have fared better than the broader market. These sectors have relatively low exposure to overseas markets.
Goldman Sachs expects the euro to fall another 12% against the dollar over the next 12 months.
“That’s an enormous headwind for companies that are selling internationally,” Mr. Kostin said.
According to FactSet, companies that generate more than 50% of sales outside the U.S. are expected to post an earnings decline of 11.6% in the first quarter when results start rolling in next month. Companies that generate less than half of sales outside the U.S. are expected to post flat earnings for the quarter, according to FactSet.
Companies in the S&P earned 46% of their sales outside the U.S. in 2014, according to S&P
Dow Jones Indexes. By contrast, 19% of sales for Russell 2000 companies comes from outside the U.S., according to Bank of America Merrill Lynch.
The flip side of the stronger dollar is the boost to non-U.S. stocks. Most notably, Germany’s
DAX, with its high concentration of manufacturing exporters, is up 23% this year. In dollar terms, the index has gained 9.2%.

“European companies will be in a much better situation as the currency weakens,” said William
Kennedy, who manages the $11.5 billion Fidelity International Discovery Fund. Mr. Kennedy has tilted the foreign-stock fund to shares of companies that stand to benefit the most from a weakening euro, such as German auto makers and other exporters as well as hotel operators.
—James Ramage contributed to this article.