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Earnings Insights: Watch the Dollar, Watch the Weather


There are two potential earnings disruptors on the horizon.

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There's been a growing discussion of the US Dollar's strength over the past couple of months, so I wanted to do a brief exploration of its relationship to corporate profits.

As you can see in the chart below, the long-term downtrend in the US dollar has coincided with rising corporate profits.

Click to enlarge

All things being equal, a weak dollar is good for exports, and it benefits company P&L's through favorable translation of profits in foreign currencies.

Many US multinationals like Caterpillar (NYSE:CAT) and Coca-Cola (NYSE:KO) have historically been huge beneficiaries of a weak dollar.

And in what has been an overall solid Q2 earnings season, [subscription required] some companies, including Johnson & Johnson (NYSE:JNJ), Nike (NYSE:NKE), and Oracle (NASDAQ:ORCL) did identify a drag from the strong dollar.

The S&P 500  (INDEXSP:.INX) nearly plowed its way up to 2000 through some pretty lousy earnings seasons.

We're up quite a bit, and not only from the 2009 low.

The S&P is up 35% since 2012 (not including dividends), mostly on multiple expansion, and while the buyback/dividend/M&A frenzy is very supportive for equities, actual fundamentals need to kick in at some point and a headwind like a continued rise in the dollar can't be welcomed.

Since we're on the topic of earnings, there's interesting issue to keep in mind -- another polar vortex, which could peak its head out in September.

According to FactSet, due to Q1's messy winter weather, utility and energy companies reported the biggest upside earnings and revenue surprises, and those stocks did extremely well as a result.

So watch the dollar, and watch the weather!

Twitter: @MichaelComeau

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