Here's an early look at what is worrying companies the most on their earnings conference calls

Key Points
  • So far, 15 of 24 companies reporting earnings, or 60 percent, cited foreign exchange issues as a negative factor either in the previous quarter or for the future, according to FactSet
  • That compares with 12 companies that mentioned tariffs and only half that number citing the duties as a headwind.
  • S&P 500 companies are on track to report a 19.1 percent earnings gain in the third quarter as well as an 11.6 percent increase in net profit margin from a year ago.
People are reflected on a window of a currency exchange in Buenos Aires' financial district, Argentina, September 3, 2018.
Marcos Brindicci | Reuters

While investors worry about the impact tariffs will have on profits, currency issues are scaring companies more so far.

Early results from third-quarter earnings season show that more executives are citing foreign exchange pressures than the tariff battle in which the U.S. has found itself with its trading partners, according to a FactSet examination of conference call transcripts.

With just 24 companies in the reporting so far, the sample size is small. But it's a trend worth watching as investors look for any sign that could derail what otherwise should be a stellar season. FactSet expects a 19.1 percent profit gain from the same period a year ago for the index.

So far, 15 of the 24 reporters, or 60 percent, cited foreign exchange issues at some point during their conference calls as a negative factor either in the previous quarter or for the future. That's a 25 percent rise from the third quarter in 2017, FactSet's John Butters noted.

A strong dollar hurts global companies by reducing their foreign earnings when translated back into dollars as well as making their products more expensive overseas. The ICE U.S. Dollar index, which tracks the greenback versus a basket of major currencies, is up 6 percent in the last six months.

Why the US is unlikely to label China a currency manipulator
Why the US is unlikely to label China a currency manipulator

The term "tariff" came up just 12 times, or 50 percent, and only half that group reported a negative impact. That's up from just one company citing the levies during the second quarter, but the bulk of the tariffs did not come online until late in the third quarter.

The worry with tariffs is that they could raise the cost of goods the U.S. imports, particularly from China, while also closing off markets to companies abroad. China has retaliated against the U.S. duties while the two sides look to hammer out an agreement.

Billionaire investor Carl Icahn told CNBC in an interview Monday that tariffs are "a dangerous game" that have led to market crashes in the past.

Companies that Butters cited offered a variety of indicators for how they were being impacted on both fronts.

'Currency-driven inflation'

General Mills said its operating profit increased by 12 percent, but that "currency-driven inflation" on products in the U.K. offset some of the benefits. IHS Markit estimated a .3 percentage point hit from forex, while Conagra, like several other companies, noted that a rising Mexican peso created headwinds.

On the tariff side, FedEx said the duties hit "a small portion" of China volume and "the uncertainty surrounding the issue is not helping and thus has a broader impact on the market." Industrial supplier Fastenal said the tariffs are "directly impacting the North American supply chain for our customers." But Costco said the issue is "a small net negative" and "we can weather it better than others."

Despite the pressure from tariffs and currency, as well as higher interest rates, earnings are expected to be stellar.

In addition to the strong bottom-line gain, FactSet expects a net profit margin increase of 11.6 percent from a year earlier, tied for the second-best since the data firm began tracking earnings 10 years ago.

A big offset for the other pressures is benefits from the corporate tax reduction passed at the end of 2017.

"The reduction in the corporate tax rate due to the new tax law is likely a significant factor, as the lower tax rate has boosted earnings for companies in the index for the quarter," Butters wrote. "It appears the lower tax rate is more than offsetting the impact of rising costs, resulting in a near record-level net profit margin for the index for the third quarter."

Net profit margin is expected to stay around current levels for at least the next several quarters.

Earnings season accelerates this week, with 55 more S&P 500 companies reporting, a list that includes seven of the 30 Dow Jones Industrial Average components.