NEW YORK — With the dollar surging more than 20 percent over the past year and seemingly on track for further gains, year-on-year earnings comparisons for the first quarter are getting bleaker, a potential blow for the nascent rally seen in U.S. stocks last week.
The dollar index, which measures the greenback against a basket of six major currencies, has gained more than 22 percent since March 2008, and it’s up more than 7 percent since the start of this year.
“The dollar has done quite well and that makes earnings comparisons difficult for multinationals in the U.S.,” said Ken Tower, market strategist at Quantitative Analysis Service.
Companies that make sales overseas in other currencies lose out when they have to translate those into a stronger dollar in quarterly reports.
At least 45 percent of the sales of S&P 500-component companies come from overseas, and possibly a lot more, as only two-thirds of companies disclose where their sales come from, according to Standard & Poor’s.
“That translates into a low single-digit percentage headwind to sales,” said Alec Young, market strategist at S&P.
The problem didn’t seem to be of an immediate concern for investors on Friday, though.
The Dow Jones industrial average gained 53.92 points to end at 7,223.87, for a whopping 9 percent gain for the week. The S&P 500 Index gained 5.81 points, or 0.1 percent, to end at 756.55, jumping more than 10.7 percent on the week. The Nasdaq Composite gained 5.40 points, or 0.4 percent, to end at 1,431.50 Friday, putting on a 10.6 percent weekly gain.
The battered financial sector seemed to have found relief last week after both Citigroup Inc. and Bank of America Corp. issued better- than-expected outlooks. Also, lawmakers urged action to remove mark-to-market accounting, which would allow financial firms to revalue the toxic assets that plague their balance sheets.
But while a bounce in financial firms’ share prices may help market sentiment, it might actually provide little actual fuel for the rally: Both share prices and market capitalizations of most financial stocks have shrunk to unprecedented levels, meaning that any gains they provide have minimal impact on either the market-cap- weighted S&P or the price-weighted Dow.
On the Dow, seven stocks whose prices hover well above others now call the shots in terms of influencing the blue-chip average: IBM, Chevron Corp., Exxon Mobil Corp., McDonald’s Corp., Wal-Mart, Coca-Cola and Procter & Gamble.
Unfortunately, all of these companies derive a substantial amount, if not most, of their sales, from overseas. When it posted earnings last month, Wal-Mart warned currency translations could hurt profit to the tune of 13 cents a share. Further gains in the dollar could make things worse.
“This is going to be a big (political) issue for the next couple of years,” said Don Straszheim, president of Straszheim Global Advisors.
