Aggregate profit growth in the U.S. has been impressive in recent years, in spite of weak economic growth over the past decade. Of course this is due in part to more robust international operations of leading U.S. multinational corporations. Coca-Cola, for example, derives approximately 80% of its profits from outside the U.S.
While Asia and South America have had faster economic growth than the U.S., Europe and Japan have been sluggish. It is exposure to rapid growth in emerging markets that has provided a particular boost to the U.S. multinationals.
I think, however, that investors don’t appreciate the substantial impact that the declining foreign exchange value of the U.S. dollar has had on the earnings of U.S. multinational corporations.
IBM is an example of a leading U.S. multinational that continues to increase its profits at an impressive rate. Investors appreciate companies with strong profit growth, but they especially appreciate companies with consistent revenue growth. IBM has become primarily a computer services business. In the most-recent quarter, IBM’s servies revenue grew 10%, which is impressive in a developed-world economy that is still struggling. But after excluding currency gains, the revenue growth was only 2%.
The conventional wisdom for some time has been that the U.S. dollar will continue to fall, with the only question being how rapidly and against which foreign currencies? (I agree that would seem most likely.) But the contrarian in me is uneasy with what seems to be so obvious. What if the U.S. dollar would actually RISE in value, or at least hold its value? Those optimistic earnings estimates for the S & P 500 would switch from a support for current stock-price levels to a substantial drag.