What a Weakening U.S. Dollar Means for Large-Cap Tech Stocks

 | Dec 27, 2022 12:22AM ET

The broader aspects of the dollar’s recent weakening will be saved for further down the article, but one thing that struck me reviewing the Q3 ’22 earnings results for large-cap and mega-cap technology was the impact the dollar strength was having on S&P 500 revenue in general, and the technology sector in particular.

Here’s a recap of the tech sector’s year-over-year (y.y) EPS and revenue growth since 2019:

  • Q4 ’22 est: -8.7% EPS gro and -0.7% revenue gro;
  • Q3 ’22 actual: -0.2% EPS gro and +7.2% rev gro;
  • Q2 ’22 actual: +1.5% EPS gro and +7.3% rev gro;
  • Q1 ’22: actual: +14.6% EPS gro and +12.4% rev gro;
  • Q4 ’21 actual: +24.6% EPS gro and +13.8% rev gro;
  • Q3 ’21 actual: +38.2% EPS gro and +19.8% rev gro;
  • Q2 ’22 actual: +49.6% EPS gro and +22.2% rev gro;
  • Q1 ’22 actual: +44.9% EPS gro and +22.1% rev gro;
  • Q4 ’20 actual: +20.4% EPS gro and +11.4% rev gro;
  • Q3 ’20 actual: +9.9% EPS gro and +4.4% rev gro;
  • Q2 ’20 actual: +5.6% EPS gro and +4.8% rev gro;
  • Q1 ’20 actual: +7.2% EPS gro and +3.8% rev gro;
  • Q4 ’19 actual: +9.2% EPS gro and +5.7% rev gro;
  • Q3 ’19 actual: -1.7% EPS gro and +1% rev gro;
  • Q2 ’19: actual: -.2.2% EPS gro and -0.3% rev gro;
  • Q1 ’19: actual: -1.1% EPS gro and -0.8% rev gro;

Readers typically only care about the future (as you should), but Technology (NYSE:XLK) and the Energy (NYSE:XLE) sectors could be mirror images of one another for 2023. Technology faces much easier compares after Q1 ’23, while Energy faces much tougher compares for most of 2023, given the surge in energy EPS after November ’20.

Technology suffered badly from compares to 2021 results, and you can see it in the numbers above. Q4 ’21 and Q1 ’22 still show hard compares for the tech sector in Q4 ’21 and Q1 ’23, but note what’s happened in late 2022 in terms of tech results, which should help the tech sector as we move through calendar ’23. Remember that technology is still 26% of the S&P 500’s market cap as of Friday, Dec. 23, 2022.

Note the tech slowdown in 2019, after Jay Powell completed the rate hikes that Janet Yellen started in Q4 ’16 after President Trump’s election.

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The point is tech has really been walloped with tough 2021 compared to a far more restrictive monetary policy by Jay Powell (i.e., PE compression, but that’s an effect of EPS and revenue slowdown, not a cause) and record strength in the dollar in 2022.

So how important is the dollar to the tech sector?

  • IBM (NYSE:IBM) in Q3 ’22 reported “fx” as a 700 basis point headwind;
  • Oracle (NYSE:ORCL) FX or “constant currency” headwind expected to be 500 – 600 bp’s in fiscal ’23 (ends May ’23);
  • Meta Platforms (META) saw a 600 bp headwind to revenue growth in Q3 ’22;
  • Apple (NASDAQ:AAPL): saw a 600 bp headwind to revenue in fiscal Q4 ’22 (ends Sept ’22);
  • Microsoft (NASDAQ:MSFT): saw a 500 bp headwind from the currency in their fiscal Q1 ’23 9Sept ’22 qtr);
  • Alphabet (NASDAQ:GOOGL): 500 bp headwind in Q3 ’22
  • Tesla (NASDAQ:TSLA): no impact that was readily discernable from Q3 ’22 results. One analyst noted a small negative EBIT variance from FX, but that was it;
  • Amazon (NASDAQ:AMZN): 400 bp headwind in Q3 ’22;
  • Nike (NYSE:NKE): Not tech, but since Nike just reported their Q2 ’23 financial results, showing a 1,000 bp headwind from fx in their fiscal Q2 ’23 (ended Nov ’22), I thought it was worth including;

Two caveats from the above detail: the headwind is being calculated from the difference between the reported revenue growth on the income statement (in dollars) and the “constant currency” growth as reported by the company, e. g., Nike reported +17% y/y revenue growth in the November ’22 quarter, and also reported (per Morningstar) +27% “constant currency” revenue growth for the November ’22 quarter, resulting in the 1,000 basis point difference between the two.

The other aspect of the currency that readers must consider for multi-national companies is the currency's impact on expenses. Although I haven’t quantified it, currency can impact expenses and revenue, and that translation impact on expenses is not always detailed or quantified in an earnings release.

My boss at a mutual fund firm in the early 1990s was the Director of Research, and I could walk into his office and ask him about anything investment-related. I asked him about the dollar’s importance – and you have to remember this was from 1992 to 1995 – and he stated that its importance was probably overestimated in the financial media.

However, Factset, which does its own earnings work and publication, has noted that, within the technology sector, non-US revenue is now slightly greater than 50% within the last ten years.

h2 The Dollar From a Broader Perspective/h2