Earnings per share (EPS) results on S&P 500 companies are coming in strong for the first quarter of 2017. According to FactSet, 76% have beat EPS estimates with an overall earnings growth of 9.2% year-over-year (YoY). This is shaping up to be the highest quarterly growth rate since Q4 2011, which was 11.6%. What’s the underlying driver for this? The “Trump bump” has been questioned quite a bit lately, as pundits debate whether US citizens will see any tax reform or deregulation bill pass Congress this year, or next. However, there’s already a market condition that’s made US stock prices look like a fair value – and that’s US dollar depreciation.
Year-to-date, the US dollar (USD) has fallen more than 3.2%, relative to a broad basket of currencies (chart above). When USD falls, the goods and services from US companies become less expensive to consumers who are converting into USD from their native currency. This serves to boost sales to foreign business units of US corporations.
Amongst all US business sectors, information technology (IT) generates roughly 60% of its revenues from non-US sources, compared with 44% for the broader S&P 500 index (source: CFRA Research). This makes it particularly sensitive to USD fluctuations. Consensus estimates IT will show the largest Q1’17 earnings growth YoY with a whopping 16.5%. No doubt, USD weakness has played a major role in generating these results. A softer USD has been a consistent benefit thread throughout this season’s earnings reports.
Even as President Trump continues to tout the benefits of a weaker USD, though regularly chastised by those around him, US stockholders are realizing the truth to the stance. A further, slightly more weakened USD will provide a nice support to corporate earnings, which in turn helps stock market prices, all the while the government can formulate its bills on major tax and regulatory reform.