Strong dollar could trigger ’earnings recession’

The surging value of the US dollar may be posing the biggest threat to corporate earnings since the 2008 financial crisis, impacting results at most US-based multinationals. Some on Wall St are even talking about an earnings recession.

The dollar’s gain of 22% in the past 12 months against a basket of major currencies has landed a double whammy on US companies with big sales abroad.

Revenue and earnings from foreign markets are worth less when translated into greenbacks and their costs become relatively less competitive against rivals producing in countries with declining currencies.

Dollar moves of this magnitude in the past have resulted in what Bank of America/Merrill Lynch strategists term an “earnings recession”, which is generally defined as at least two successive quarters of declining earnings from the year-earlier quarters. The brokerage says a 25% gain in the dollar in a 12-month period has historically coincided with a 10% decline in the market’s earnings per share.

That has not happened yet — but the downward trend is clear. Wall St analysts currently estimate earnings growth of 1.3% for 2015, down from a forecast of 8.1% at the beginning of the year. The S&P 500’s earnings per share are expected to drop 3.1% in the first quarter and 0.7% in the second quarter before recovering modestly in the second-half of the year.

Nearly one-fifth of S&P 500 companies have warned on earnings for the first quarter, with at least 49 companies mentioning the effects of the dollar on results, according to Thomson Reuters.

Bloomberg