The dollar's huge strength means investors should prepare for fewer earnings beats from S&P 500 companies, Goldman Sachs says

The US Dollar Index has hit a 20-year high in 2022. EVA HAMBACH/Getty Images

• S&P 500 firms may beat quarterly earnings expectations at a lower pace than the first half of the year, Goldman Sachs says.
• That's because a soaring dollar could eat into overseas profitability.  
• Many companies "will undoubtedly emphasize their performance on a 'constant currency' basis," said Goldman's US equity strategists. 

Quarterly sales results due to kick off from Corporate America this week appear on track to exceed expectations at a lower pace than the first half of 2022, with sales hurt by the jump in the US dollar's value, according to Goldman Sachs. 

The dollar has been among the best-performing assets of 2022, largely on the back of the fast pace of big interest-rate hikes by the Federal Reserve as it works to tame high inflation. The investment bank in a note published Monday said the trade-weighted US dollar rose by 9% versus the third quarter of 2021 and the move represents a headwind on the translation of sales made overseas by US companies. 

"The implied relationship between dollar strength and top-line results suggests that fewer S&P 500 firms will beat consensus sales forecasts in 3Q compared with 49% in 1Q and 45% in 2Q 2022," said US equity strategists at Goldman Sachs led by David Kostin. 

Goldman in an example said Levi's last week reported below-consensus revenue and operating margins "partly due to FX headwinds." The jeans maker posted year-over-year third-quarter sales growth of 1% to $1.52 billion. The result fell short of the FactSet consensus estimate of $1.57 billion.

Levi's said sales rose by 7% on a constant-currency basis compared with the same period a year ago. 

"The move in FX means most firms will announce 3Q results in regular terms but will undoubtedly emphasize their performance on a 'constant currency' basis," Goldman wrote. 

Continued dollar strength should "support the performance of stocks with 100% domestic sales" relative to those that have a higher proportion of foreign sales, the strategists said. The median stock in a Goldman basket of stocks with high domestic sales exposure "offers slightly faster 2023 EPS and sales growth," the strategists said.

The US Dollar Index, which tracks the greenback's performance against six other currencies, has reached a 20-year high this year. The dollar has risen 26% against the Japanese yen and 16% against the euro.  

Dollar strength, corporate taxes stemming from the government's new Inflation Reduction Act, and headwinds to margins are elements that could lead to negative revisions to S&P 500 consensus estimates for 2023 per-share earnings, the bank said. 

Goldman foresees 2023 per-share earnings of $234, or 3% growth, in its baseline, soft-landing economic scenario. The view runs below the current consensus forecast of $241 a share, or 7% growth.

"However, in a hard landing scenario, we expect earnings will fall by 11% to $200 driven by 126 bp of margin contraction to 11.0%. If investors price a recession scenario, the [S&P 500] index would fall to 3,150." 

The S&P 500 on Tuesday was up slightly, at around 3,663. It's lost about 24% in 2022, with investors anticipating higher borrowing rates will put pressure on corporate earnings and throw the US economy into a deeper contraction. The Fed is expected in November to raise the fed funds rate for the sixth time this year.

A Goldman Sachs chart shows a stronger dollar is correlated with fewer revenue beats. FactSet, Goldman Sachs