By Ben Eisen
A pickup in global growth and a weakening dollar are boosting
profits at many U.S. exporters, helping support the yearslong rally
in the stock market and tipping major indexes to new records.
Boeing Co. led the Dow Jones Industrial Average to a new high on
Wednesday, rising almost 10% after beating analyst expectations and
giving investors confidence that rising global airline traffic will
lead airlines to follow through on the jet orders they have
placed.
Boeing joined Facebook Inc. and Hershey Co. in reporting strong
earnings Wednesday. The S&P 500 rose 0.70 point, or less than
0.1%, to 2477.83.
The reports picked up on a theme recurring during the
second-quarter earnings season: Companies are benefiting from
growing demand for goods and services by foreign buyers as well
expectations for faster global growth with continued low
inflation.
The belief in corporate earnings has helped propel markets to
new highs for the past year. Recent earnings periods have helped
solidify that view.
Earnings from America's largest companies have in large part
helped keep the market rally going in the face of political
uncertainty at home and abroad.
Profits at companies in the S&P 500 rose 14% in the first
three months of the year, and second-quarter earnings are projected
to have climbed 8.2% versus the prior-year period, according to
FactSet.
"Earnings in general have been very good," said Paul Brigandi,
managing director and head of trading at Direxion Investments, an
exchange-traded fund provider. "That's fueled the continued
optimism in the market."
The declining dollar is also helping drive earnings higher. U.S.
exports become cheaper to foreign buyers when the dollar's value
falls.
The U.S. currency slid again Wednesday after the Federal Reserve
left its benchmark interest rate unchanged. Many analysts don't
expect the Fed to raise rates again until December, and a slowdown
in inflation could keep the dollar under pressure.
With the Fed's commentary suggesting the central bank will keep
rates low for the time being, investors say U.S. stocks should keep
eking out gains, provided that corporate earnings continue to be
supportive.
The Dow Industrials rose 97.58 points, or 0.5%, to 21711.01 on
Wednesday., setting another new high.
Coca-Cola Co. Chief Financial Officer Kathy Waller cited the
"slightly better currency environment" as a reason the company was
raising its earnings forecast for the full year, saying Wednesday
it expects adjusted earnings per share to be flat to down 2%,
compared with guidance of a 1% to 3% decline from the year prior.
It shares climbed 1.1% to $45.74.
"Clearly a weaker dollar is helpful there," Fredrik Eliasson,
the sales and marketing chief at railroad company CSX Corp., said
on an earnings call last week, referring to the company's
coal-exports business. The company transports U.S. exporters'
freight. "And I think as we look at some of the other markets, we
will see some of those benefits. I don't think we've seen a lot of
it yet, but anytime we have a little bit of weaker dollar, it does
help them."
The ICE Dollar index, which measures the currency against six
peers, is down about 8.6% this year at its lowest level in 13
months. The euro, which is heavily weighted in the index, has been
a standout performer, rising almost 12% against the dollar this
year.
The dollar has tumbled in 2017 after a rally that followed the
U.S. presidential election, when investors bet on faster growth and
higher inflation under the Trump administration. Tepid data on
inflation, auto and retail sales have pressured the U.S. currency
recently, and investors and analysts have tempered expectations for
President Donald Trump's policy agenda.
The Fed has penciled in one more rate increase this year, but
some investors believe that plan will be thwarted by persistently
weak inflation, which has continued to undershoot the central
bank's annual target of 2%. The fed funds futures market, where
traders bet on the future rate path, suggests a 49% probability of
at least one more increase before the end of the year, according to
data from CME Group.
A weaker dollar, if it lasts, could further fuel earnings gains
in the coming quarters. If the ICE Dollar Index ends 2017 about
where it is now, the drop for the year would lift per-share
earnings in the S&P 500 by roughly 4% in 2018, according to
Morgan Stanley, which estimates that profits increase 1% for every
2% fall in the dollar.
Some experts say the dollar is poised to fall further,
particularly if Mr. Trump, facing resistance to his economic
agenda, attempts to use the currency as a tool to help the economy
grow faster. He could do so by, "jawboning the dollar further down
and instituting policies that are more dollar depreciative in
nature," said Adrian Helfert, head of global fixed income at Amundi
Smith Breeden.
Mr. Trump praised Fed Chairwoman Janet Yellen for keeping the
dollar "not too strong," in an interview with The Wall Street
Journal Tuesday.
There are risks for companies banking on a lift from currency
movements. If the Trump administration chooses to pursue
protectionist trade policies that provoke tit-for-tat tariffs, it
could undermine the advantages of a weaker dollar by adding other
costs for exporters. Mr. Trump, for example, is considering whether
to block steel imports, telling the Journal Tuesday that he would
take his time to make a decision.
Many firms hedge their currency exposure to reduce its impact on
earnings. Toy company Hasbro Inc., for example, hedges nearly three
quarters of its costs, Chief Financial Officer Deborah Thomas said
on an earnings call Monday.
"To the extent we haven't hedged, we should get some benefit
from it. But on a full year basis, again, we really hedge to
protect the pricing that we offered to our retailers," she
said.
Some said a stronger global economy was helping results. M.
Keith Waddell, chief financial officer at staffing agency Robert
Half International Inc., cited a strong operating environment
outside the U.S., particularly in Europe, on an earnings call
Tuesday afternoon. The stronger euro, he said, was simply "even
more icing."
--Amrith Ramkumar contributed to this article.
(END) Dow Jones Newswires
July 27, 2017 08:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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