Strengthening dollar threatens the profits of technology companies

Shares of technology companies are now experiencing their worst period in decades.

Large tech companies earn 58% of their revenues outside the U.S., the highest share among the 11 S&P 500 groups, according to FactSet. Such performance makes companies especially vulnerable to the dollar -- as the dollar strengthens, companies' non-dollar earnings decline, which can cause millions of dollars in lower revenues for companies.

Back in June, Microsoft reported its slowest revenue growth since 2020. Now corporate officials have warned that they expect revenue growth to decline by five percentage points next quarter because of a stronger dollar. Google, parent company Alphabet Inc., believes currency fluctuations will also impact their results in the upcoming reporting season.

In the past, investors didn't pay attention to currency fluctuations because the impact of a strong dollar could be offset by economic growth. For example, in 2014, the dollar rose sharply after investors bet that the Federal Reserve would soon resume raising interest rates for the first time since the global financial crisis. Unlike the eurozone and Japanese economies, the United States economy was strong enough for the Fed to consider raising rates from near zero. A resilient economy tends to provide good corporate profits.

This year is notable in that the U.S. dollar is rising at a time when many economists expect a significant slowdown in economic growth - both outside and inside the United States. In June, The Wall Street Journal conducted a survey of economists. They were asked how likely a U.S. recession was over the next 12 months. Economists put that probability at 49%. This is the highest since the Covid-19 pandemic began in July 2020. 

Jonathan Golub, chief strategist for U.S. equities and head of quantitative research at Credit Suisse, said that throughout history, every 8 to 10 percentage points increase in the dollar against other currencies takes about 1 percentage point off U.S. earnings growth

The drop in tech stocks to multi-year lows over the past several months can be attributed to a combination of factors: slowing economic growth, a stronger dollar and higher interest rates.