Shrinking dollar could boost the market and make these stocks big winners

The weaker dollar could give Wall Street's bull more room to run, and boost the earnings growth of multinationals and commodities companies in the second half of the year.

With the latest drubbing, strategists have been taking a look at the impact of the slumping dollar on corporate profits, and it could provide an unexpected windfall. The U.S. Dollar index is down 8 percent so far this year, and the S&P 500 is already up 10.3 percent.

The dollar soared right after the election in late 2016 on the prospect of President Donald Trump's pro-growth policies boosting the economy and earnings. But since then, there has been no action on tax reform or fiscal stimulus, and Congress continues to struggle with health care. As a result, the Trump factor has been more than reversed.

"The buck should boost, not bite," said Sam Stovall, chief investment strategist at CFRA. "In the fourth quarter, we're going to see a reverse image of last year. While the buck took a bite out of earnings last year, it should boost them this year. ... It's also reflective of investors anticipating that the Fed is not going to be raising rates as much as was expected earlier in the year."

Analysts say the companies most likely to feel the impact of a weaker dollar are those with the most exposure overseas, as well as commodities-focused companies since the dollar weakness pushes commodities higher. Foreign sales accounted for 42.3 percent of 2016 revenues of S&P 500 companies, down from 44.3 percent the year earlier and the lowest percentage since 2003, according to Standard & Poor's.

Morgan Stanley analysts say for every 1 percent drop in the dollar, S&P 500 earnings could gain a half percentage point. The analysts said the dollar impacts earnings on a rolling basis and it should show up as a positive in the second half. In an example, they noted that an 8 percent decline in the dollar index by year-end would equate to a 4 percent gain in 2018 earnings per share. The firm said the dollar could fall as much as 5 percent more, and if that happens, the boost to earnings could be 6.5 percent.

Jim Paulsen, chief investment strategist at The Leuthold Group, said while earnings have been solid this quarter, companies appear more guarded in their comments. But the falling dollar hasn't become a topic of discussion yet, and that could help the outlook for companies with overseas profits.

Source: Bloomberg Pro Terminal

Jr Trader Alexander Kumanov

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