The Trump administration’s failure to push through a new healthcare law has possibly sandbagged hopes of policy measures boosting stocks in the near future. In fact, investors now have little confidence left in the President’s pre-poll promises and are starting to bank on fundamental concerns when evaluating investment options. Needless to say, earnings performance and the state of the economy feature at the top of a list of such factors.
Meanwhile, market watchers now believe that a falling dollar is just the tonic markets need. The decline in the greenback could provide equities with fresh upside by boosting earnings of commodity-centric and multinational companies. In a volatile scenario, investing in stocks of this nature, which are large enough to be included in the S&P 500, makes for a profitable option.
Policy Paralysis Fells Dollar
The dollar’s recent set of declines has provided analysts with an opportunity to determine whether it could have a positive effect on corporate earnings. To understand the gravity of the situation, one need to look no further than the U.S. Dollar Index, which is down 8% year to date. In comparison, the S&P 500% has already gained 10.3% over the same period.
Immediately after Trump’s surprise victory, the dollar soared on hopes that the President’s growth-oriented and industry-friendly policies would boost the economy and earnings. However, repeated failures at pushing through policy proposals have left investors somewhat disenchanted. With little headway made on tax reforms, fiscal stimulus measures and a new healthcare law, the so called “Trump Trade” has experienced a reversal, leading to the greenback’s decline.
Falling Dollar to Boost Earnings
Instead, investors have chosen to focus on the state of the economy, the reluctance of the Fed to raise rates and a likely strong second quarter earnings season. And a clutch of analysts now feel that a softer dollar is just the tonic earnings need.
While earnings felt the heat of a soaring dollar last year, a decline could be extremely beneficial this time around. Additionally, this phenomenon illustrates how expectations about the extent to which the Fed could hike rates have undergone a change.
A fall in the dollar usually has a positive impact on the price of commodities. This is why companies which stand to gain handsomely from the dollar’s decline are those whose businesses are commodity centric or multinationals with significant overseas exposure. According to analysts at Morgan Stanley (MS - Free Report) , S&P 500 earnings could increase by 0.5% for every 1% decline in the dollar.
The financial major explained that this factor impacts earnings on a rolling basis and its effects could become apparent in the second half of the year. By this logic, an 8% decline in the dollar’s value by the end of the current year could boost 2018 earnings by 4%. If, as Morgan Stanley projects, the dollar declines by an additional 5%, earnings could grow by around 6.5%
Corporate earnings are likely to receive a welcome boost from the plunge in the dollar’s value. This is likely to be especially beneficial to those companies which deal in commodities or those with primarily multinational operations.
Adding stocks of companies with a high percentage of overseas sales, according to Strategas Research Partners, and which make up the S&P 500 looks like a smart option at this juncture. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Micron Technology, Inc. (MU - Free Report) is one of the leading worldwide providers of semiconductor memory solutions.
Micron Technology has a Zacks Rank #1 (Strong Buy). Its expected earnings growth for the current year is more than 100%. Its earnings estimate for the current year has improved by 11.1% over the last 30 days.
NVIDIA Corporation (NVDA - Free Report) offers digital media processors and related software for a wide range of visual computing platforms.
NVIDIA has a Zacks Rank #1. The company has expected earnings growth of 19.9% for the current year. Its earnings estimate for the current year has improved by 0.1% over the last 30 days.
Lam Research Corp. (LRCX - Free Report) supplies wafer fabrication equipment and services to the semiconductor industry.
Lam Research has expected earnings growth of 11% for the current year. Its earnings estimate for the current year has improved by 1.9% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Applied Materials, Inc. (AMAT - Free Report) is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells and modules.
Applied Materials has a Zacks Rank #2 (Buy). Its expected earnings growth for the current year is 77.1%. Its earnings estimate for the current year has improved by 0.3% over the last 30 days.
Abbott Laboratories (ABT - Free Report) discovers, develops, manufactures and sells a diversified line of health care products.
Abbott Laboratories has a Zacks Rank #2. The company has expected earnings growth of 12.3% for the current year. Its earnings estimate for the current year has improved by 0.5% over the last 30 days.
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