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Tuesday Look Ahead: Dollar Will be a Key to Earnings Season

Published: Monday, 12 Oct 2009 | 7:44 PM ET

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By: Patti Domm
Executive Editor

The positive side of the weak dollar story should show up this week, as a parade of multinationals report earnings.

A New York Stock Exchange trader.
Oliver Quillia for CNBC.com
A New York Stock Exchange trader.

Johnson and Johnson [JNJ Loading... () ] and Intel [INTC Loading... () ]are the big names Tuesday, and they are followed by Abbott Labs[ABT Loading... () ], J.P. Morgan[JPM Loading... () ], Citigroup[C Loading... () ], IBM[IBM Loading... () ], Google[GOOG Loading... () ], Goldman Sachs[GS Loading... () ] and General Electric[GE Loading... () ] later in the week.

The dollar should help some of these companies, just as it is helping the likes of Black and Decker[BDK Loading... () ]. That company Monday increased its third quarter forecast, citing currency benefits as one reason. Black and Decker is also getting a lift from cost cuts, lower prices for parts and a lower tax rate.

The impact of currency on S&P 500 companies is not trivial. In 2008, 48 percent of all revenues were generated outside the U.S., up from 46 percent in 2007 and 44 percent in 2006.

Third quarter earnings for the S&P 500 are expected to be down 24.6 percent from last year. In the second quarter, profits were down more than 27 percent. The decline in sales, meanwhile, is expected to be down 7 percent, compared to a decline of 19 percent in the second quarter, according to Standard and Poor's.

Earnings Central

"Currency will be a big positive impact. The lower dollar has many concerns to it, but it has a benefit to multinationals, and I think that is a big expectation in terms of the quarter," said Chris Sheldon, director of investment strategy at BNY Mellon Wealth management. Sheldon believes positive earnings surprises will be one factor that could keep the market moving higher for now.

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"It appears the estimate for the third quarter earnings compared to second quarter are relatively on par. Given there has been some improvement in the tone of the economy and you have this currency affect..you have some upside," he said.

Sheldon said he will be watching for comment from companies on 2010. "As you get into 2010, we need to see more top line growth," he said.

Johnson and Johnson is expected to report profits of $1.13 per share on revenues of $15.22 billion. Deustche Bank pharmaceutical analyst Barbara Ryan said while she does not cover Johnson and Johnson, it could be an early indicator for the group, as the first major drug company to report. Ryan said she expects the dollar impact for the industry to be negative for the quarter but the greenback's decline may contribute to some upside earnings surprises.

"The way I would characterize it is it's going to be substantially less negative than in the previous quarters. Based on the year-over-year change, it's still going to be a negative but in the fourth quarter, it's going to be positive," she said. Ryan said some overseas operations close their books earlier than others, and may not see the full benefit from the dollar's third quarter decline.

Which Companies Likely to Beat Earnings Estimates

Other major drug companies report next week. "Like past quarters, I think they're mostly going to beat expectations and whether people reward them or not for that is a function of what happens elsewhere, i.e.. signs about the outlook for the recovery," she said.

Dollar Dilemma

The dollar slipped again Monday, as stocks and commodities rose. The Dow closed modestly higher, up 20 to 9885, after hitting a new intraday high for the year. The Dow closed at its highest level since Oct. 6, 2008. The S&P 500, meanwhile, was up 4 at 1076, its highest close since Oct. 3, 2008.

The dollar fell by a half percent against the euro to $1.4781 per euro, and oil, lifted by the weak dollar, rose 2 percent to $73.27 per barrel.

Boris Schlossberg of GFT Forex said if there's good news on the consumer front, the dollar could start to gain some traction. This week's data on the consumer includes Wednesday's retail sales for September and weekly jobless claims on Thursday. Consumer sentiment will be important on Friday. Good news on the consumer and jobs front would signal markets that the Fed could start to reverse its current policies.

CONTINUED: What Else to Watch

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