By Jamie McGeever
ORLANDO, Florida (Reuters) – While “U.S. exceptionalism” has undoubtedly helped drive Wall Street’s record-busting returns in recent years, it should not be confused with isolationism.
The fourth-quarter U.S. earnings season that gets underway in earnest this week is a reminder that American firms – magnificent as some may be – still operate in a global marketplace. Weak economies and lackluster demand abroad, combined with a robust dollar, could erode American corporate profitability, calling into question whether the U.S. is so exceptional after all.
With the dollar appreciating broadly and rapidly, exchange rates will soon bite into corporate profitability. The question is how deep.
Analysts at Apollo Global Management (NYSE:APO) note that more than 41% of S&P 500 firms' revenues come from abroad. That's the highest since 2013 and not far behind the record high of 43.3% in 2011.
This leaves these firms vulnerable on two levels. First, sub-par growth in many key economies and trading partners such as China, Canada and Europe should, all else being equal, cause demand for U.S. goods to weaken. And second, revenues accrued abroad will now be worth significantly less in dollar terms than they would have a year ago.
The dollar is on a tear. It has risen 10% since late September and is up 7% year-over-year. It is now the strongest it has been in more than two years against a basket of G10 currencies, notching multi-year highs against sterling and the Canadian dollar.