US multinationals set to face much more pain from strong dollar

The surging value of the US dollar may be posing the biggest threat to US corporate earnings since the 2008 financial crisis, hurting results at most U.S.-based multinationals. Some on Wall Street are even talking about an earnings recession.

The dollar's gain of 22 percent in the past 12 months against a basket of major currencies has landed a double whammy on US companies with big sales abroad. Revenue and earnings from foreign markets are worth less when translated into greenbacks and their costs become relatively less competitive against rivals producing in countries with declining currencies.

Dollar moves of this magnitude in the past have resulted in what Bank of America/Merrill Lynch strategists term an "earnings recession," which is generally defined as at least two successive quarters of declining earnings from the year-earlier quarters. The brokerage says that a 25 percent gain in the US dollar in a 12-month period has historically coincided with a 10 percent decline in the market's earnings per share.

That hasn't happened yet - but the downward trend is clear. Wall Street analysts currently estimate earnings growth of 1.3 percent for 2015, down from a forecast of 8.1 percent at the beginning of the year, according to Thomson Reuters data. The S&P 500's earnings per share are expected to drop 3.1 percent in the first quarter and 0.7 percent in the second quarter before recovering modestly in the second-half of the year.

Nearly one-fifth of S&P 500 companies have warned on earnings for the first quarter, with at least 49 companies mentioning the effects of the dollar on results, according to Thomson Reuters.

"This is just the beginning," said Richard Bernstein, veteran Wall Street strategist and now CEO of Richard Bernstein Advisors in New York.

"This impact of the dollar on US earnings could last for three to seven years. It may not happen every quarter but there's a secular risk to US earnings, primarily to multinationals, as the dollar appreciates."