A strong dollar and soaring inflation could be a brutal cocktail for S&P 500 firms, and investors should expect downward earnings revisions, Morgan Stanley says
- A strong dollar combined with
inflationspells trouble for US stocks, Morgan Stanley said.
- The US Dollar Index has risen 16% year-over-year, presenting a big hurdle for US firms with business overseas.
A strong US dollar and sky-high inflation will be a strong headwind for earnings of S&P 500 companies going forward and will put a lid on the stock market's recent rally, Morgan Stanley's equity research chief said in a note.
The US Dollar Index is already up 16% year per year, to 108.04 as at 10:15 a.m. ET. The dollar's relative strength against a basket of foreign currencies bodes poorly for US firms that do a significant amount of their business overseas, as other countries shy away from more expensive US products.
"This could not be coming at a worse time as companies are already struggling with margin pressure from cost inflation,higher/unwanted inventories,and slower demand," Morgan Stanley's Mike Wilson wrote.
The jump in the dollar versus other currencies is "about as extreme as it gets," Morgan Stanley said, adding that a 16% rise in the greenback implies a fall of about 8% in earnings per share of S&P 500 companies. That will pile onto already diminished demand from domestic consumers who are adjusting their spending habits to deal with the highest inflation in over 40 years.
"The dollar strength is just another reason to think earnings revisions are coming down over the next few earning seasons," the bank said. "The recent rally in stocks is likely to fizzle out before too long."
The dollar is also expected to keep gaining strength, at least until the
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