Why a weak dollar is bullish for the tech industry
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The relentless decline of the dollar in recent months has a silver lining for the tech rally in the stock market.
Why it matters: A declining dollar can be considered bullish for U.S. stocks, as it provides an earnings boost for globally exposed companies when they convert their international revenue into dollars on financial statements.
- With tech and communication services now accounting for nearly half of the S&P 500's market cap, a rally in those sectors would almost certainly lift the broader index.
How it works: Take Apple, one member of the Magnificent 7 tech heavyweights, which get about 60% of their revenue outside the U.S.
- Say Apple sells an iPhone for €1,000 in Europe. The company will then convert this sale into U.S. dollars when it reports earnings.
- Today, €1 equals $1.17, so a €1,000 sale could convert to $1,170 in reported revenue. In this hypothetical, Apple didn't raise prices or sell more. It just benefits from a weaker dollar.
What they're saying: "People are really underestimating how good that weaker dollar is, particularly for tech," Max Kettner, the chief multiasset strategist at HSBC, tells Axios.
Yes, but: There's concern that an earnings beat driven by dollar weakness isn't real since it's not rooted in company fundamentals.
- Some investors question the earnings quality of growth from currency conversions, which can change, rather than underlying financials, like increased revenue.
Zoom out: Kettner is pitching bullishness to clients.
- One recent caller only wanted to discuss left-tail risk, the risk that you lose money. Kettner sees the larger risk on the right tail, where you lose out on making money.
- "We could genuinely squeeze 10% higher over the next two or three months because the earnings are so strong," he says.
What to watch: Earnings season kicks off again in a few weeks. Tech earnings expectations for Q2 mirror Q1, with growth expected to be essentially flat.
- Kettner says dollar weakness could yield an upside surprise in tech earnings that investors are missing now.
- "Equities are virtually at an all-time high, and all the short term positioning stuff from us is still sending buy signals," he says.
- "It's nuts…We've never had that."
