We are finally in the heart of earnings season, and two clear trends are emerging:
1) Earnings have stopped dropping as more companies than normal beat estimates, and
2) Revenues are bad and getting worse.
Almost to a company, weak revenues are being mostly or largely blamed on the strong dollar, and with some justification: the Dollar Index rose almost 10 percent on the quarter, an amazing move.
I've held back on making broad comments on this because we haven't had many companies reporting. But now roughly 90 of the S&P 500 companies have reported. On Tuesday, we are seeing comments from several multi-industry companies that sell internationally to many different businesses.
And I don't like what I am hearing:
Dover, which makes drilling equipment, pumps, and refrigeration & food equipment, says revenues are 4 percent lower because of the stronger dollar;
Kimberly-Clark said foreign exchange would cut their 2015 operating profit by 9 to 10 percent;
Illinois Tool Works, which makes automotive parts, food equipment, and electronics all over the world, is reducing its 2015 full-year earnings guidance by 15 cents a share to reflect current exchange rates;
United Technologies said earnings of $1.58 would have been 7 cents higher were it not for the impact of the dollar;
Harley Davidson said sales fell 4 percent, hurt by currency and lower shipments; Morningstar estimated negative currency reduced revenues by 3.5 percent.
Dupont said sales were down 9 percent, with the majority of the drop due to the strong dollar.
Here's what's alarming: the impact on revenues from the strong dollar is much more significant than analysts had estimated.
That's why revenue estimates for the S&P 500 keep dropping. They are now expected to decline 3.3 percent for this quarter, on March 31 they were expected to decline only 2.6 percent, according to Factset.
It's unusual for earnings or revenue numbers to keep dropping once the quarter begins.
How did this happen? The analysts are not currency strategists: they have no idea what the exchange rate will be in the next few months.
When analysts estimate earnings, they typically use a static exchange rate...that is, whatever it is that day.
And the dollar has significantly strengthened since many analysts made their estimates.
When companies report, they will use a weighted average exchange rate for the period they are reporting for. But unlike the analysts, they already know what the currency effects are when they report.
Here's the issue: "the dollar is killing us" has become "the dog ate my homework" excuse for every company missing on revenues; can we sort it out?
I think we can. Factset has looked at the revenue from companies that get more than 50 percent of their sales outside the U.S. There is a very clear hit to revenues from companies that get a majority of their sales overseas:
Q1 S&P 500 revenues
More than 50 percent of sales outside the U.S.: down 10.8 percent
Less than 50 percent of sales outside the U.S. up 0.1 percent
Wow. Multinational corporations—those with more than 50 percent of sales outside the U.S.—are clearly having bigger revenue hits than those that operate largely in the U.S.
The conclusion: the stronger dollar has made U.S. multinationals less competitive.
That, as Nick Raich at Earnings Scout and others have noted, is why U.S. stocks are lagging their global peers in 2015.