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'Honeymoon period' coming for stocks with big overseas earnings, thanks to weakening dollar

  • The dollar dropped vs. the euro Monday following the market-friendly outcome of the French election.
  • Given this move lower in the greenback, factors "are conspiring for a 'honeymoon period' for overseas earnings," said Jefferies Chief Global Equity Strategist Sean Darby.
  • US technology stocks, including Priceline.com, are poised to post a profit windfall because of the weak currency, history shows.
People walk past a currency exchange shop displaying a giant US dollar in downtown Cairo, Egypt on November 3, 2016.
Khaled Desouki | AFP | Getty Images

The days of dollar strength appear to be over now that the French election has sounded the all clear on the euro, creating a potential big boost for profits of global-oriented U.S. companies in the coming months.

Three factors "are conspiring for a 'honeymoon period' for overseas earnings," Sean Darby, chief global equity strategist at Jefferies, said in a Monday note.

1. The dollar is weakening as Fed rate hike assumptions are pushed out and as political uncertainty in the U.K. and Europe recedes.

2. Earnings revisions in Europe and parts of EM are accelerating faster than the
U.S.

3. Concerns over protectionism are fading at the same time as global
trade is rebounding.

A key driver of dollar weakness is renewed strength in the euro, which on Sunday hit its highest level against the greenback since Nov. 10 after a market-friendly result from the first round of the French election. Centrist presidential candidate Emmanuel Macron took nearly 24 percent of the vote and far-right candidate Marine Le Pen took 21.5 percent. Macron is expected to win the second round on May 7 by a wide margin.

"It's going to be hard to hold it down now that the French election is over and the data is OK," said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie. "I don't think we're going to end the year much different from here but in the near term there's definitely some momentum."

The U.S. dollar index fell more than 1 percent overnight to below 99, its lowest since Nov. 11. A weaker dollar increases the U.S. value of overseas earnings for companies — such as those in technology — that generate a significant part of their revenue from foreign countries.

The euro is now up more than 3 percent against the greenback since the beginning of the year.

The last 11 times the euro gained more than 3 percent against the dollar over six months, technology and consumer discretionary had an average return of at least 5 percent, according to Kensho, a quantitative analytics tool used by hedge funds.

Some of the top individual stock performers over that time included:

  • Priceline.com, which generates 80.3 percent of revenue from overseas, according to Bespoke Investment Group.
  • Mastercard — 61 percent of overseas revenue.
  • Skyworks Solutions — 97.9 percent of overseas revenue.
  • Broadcom — 88.9 percent of overseas revenue.
  • Wynn Resorts — 60.4 percent of overseas revenue.

In the Monday note, Jefferies upgraded its view on the technology sector to "modestly bullish," noting that about 58 percent of tech stocks' sales come from overseas.

"A weaker U.S. dollar and sales rebounding from a low base in Europe and emerging markets will likely underwrite overseas profits for FY17," Darby said.

Tech has the greatest weighting in the S&P 500 and is the top performer in the index so far this year.

Other investment firms are betting on a weaker dollar against the euro as well. Last week, Goldman Sachs closed two of its long U.S. dollar trades, including one against the euro.

"The outlook for U.S. firms with the highest domestic sales exposure is less favorable than we had expected postelection," Goldman's chief U.S. equity strategist, David Kostin, said in a Friday note.

— CNBC's John Melloy contributed to this report.

Disclosure: CNBC's parent NBCUniversal is a minority investor in Kensho.

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