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Investment Returns, Strong Dollar on Course to Butt Heads

What do Applied Materials, Boeing, Coach, Ford, Intel, McDonald’s, Nike and Pfizer all have in common? Besides being in the S&P 500, they all do a lot of business outside the U.S. In fact, nearly half the firms in the S&P 500 get 46% of their sales and half their profits from business conducted internationally. 

Global scale is the envy of many businesses. But as a world player, you also are subject to the “ties that bind,” like international currency relationships. 

Consider right now that the U.S. dollar is strong relative to other currencies. That’s a good thing, right? Yes and no. For the firms doing well overseas, it means their international sales translate into fewer U.S. dollars upon currency conversion.

Case in point – Proctor & Gamble. Its Q4 2014 results showed a 4% decline in sales from the previous year’s period, but a whopping 31% drop in profits year-over-year. And the strength of the U.S. dollar is to blame.

Other economic giants like the European Union and Japan have been printing money, causing our dollar to spike. After all, the dollar is at a nine-year high.

The result is our domestic products are more expensive for foreign buyers, which is inflating firms’ international sales figures. All of this will hurt the S&P 500 big time.

Let’s go back to P&G. Its forward-looking estimates are bleak, with 5% lower sales and 12% lower profits projected for 2015. The rising dollar is depressing the firm’s profits, and Wall Street is blind to it.

The way I see it, Wall Street is grossly underestimating the profit-crushing power of a strong dollar, while simultaneously overestimating corporate growth. 

When reality rears its head, the market’s immense returns party will come to a crashing halt.

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