How a strong dollar is hitting Microsoft and other big US companies

Microsoft Corp.

MSFT 0.79%

On Thursday, it cut its forecast for sales and earnings, citing gains in the US dollar in currency markets. Here’s why the dollar has soared so much this year and what that means for companies and stocks.

The U.S. dollar index, which tracks the currency against a basket of others, has risen around 13% over the past year, defying high inflation to reach levels not seen since the start of the years. 2000.

This is partly because investors around the world have been drawn to the United States as a source of relative economic strength and stability. Russia’s war in Ukraine and the resurgence of Covid-19 in China have rattled markets, affecting the supply of key commodities and driving up energy prices, threatening economies around the world.

When investing in US stocks and bonds, foreigners generally have to use dollars, which pushes the currency higher.

What are the consequences of a stronger US dollar?

A stronger national currency has advantages and disadvantages for the country issuing it. On the positive side, Americans are seeing their money go further when buying goods and services abroad. Imports become cheaper. A cup of espresso in Paris or a bowl of noodles in Tokyo cost less, in dollars, than before.

On the other hand, the stronger dollar means that American products are less affordable to foreigners. This makes it harder for people from other countries to visit the United States, which hurts hotels and other tourism-dependent industries. In the same way, the strong dollar is also reducing the international sales of all kinds of American companies.

Why is Microsoft suffering?

As a global provider of everything from desktop software and cloud computing services to laptops and video game consoles, Microsoft derives most of its profits from overseas. Last fiscal year, the company’s pretax foreign income was $36.1 billion, compared to $35 billion domestically. This outsized share of international trade means that a strengthening dollar weighs on the company’s operations.

In April, the rise of the dollar was already worrying. Microsoft Chief Financial Officer Amy Hood told analysts that in the last fiscal quarter, currency effects reduced the company’s sales by $302 million. Total revenue for the quarter was $49.4 billion.

On Wednesday, Microsoft sent another wake-up call about the impact of the strong dollar, reducing its revenue and earnings outlook. The company told investors it now expects currency movements to reduce sales by $460 million more than it had expected in the current quarter. Profit will also suffer, Microsoft warned.

What are other companies saying?

Various American companies that sell products overseas face similar dynamics. Other tech companies are a prime example. Salesforce Inc..

cited dollar strength this week when it cut its full-year sales outlook, doubling its estimate of the currency’s expected impact on revenue to $600 million.

Pharmaceutical companies that sell drugs and medical products in international markets have also been affected. At the end of April, the pharmaceutical company AbbVie Inc..

said currency effects weighed on sales by 1.3% in the first quarter of this year – and that was before the dollar hit recent highs last month. For the full year, AbbVie forecast that the rising dollar would affect sales by 1.4%.

Manufacturers with large export markets are another potential victim. Last month, Deere & Co.

a maker of agricultural and construction equipment, also warned that a stronger dollar would likely hurt its sales.

What other companies are investors watching?

Companies with significant sources of foreign revenue are already taking a hit in the stock markets.

The S&P 500 Foreign Income Exposure Index has fallen about 17% so far this year, compared to the broader S&P 500 Index’s 13% decline. Meanwhile, the S&P 500 US Revenue Exposure Index, which includes the companies most dependent on domestic sales, lost just 7%.

Among the big names in the index most exposed to foreign money: Microsoft, Apple Inc.

parent company of Google Alphabet Inc.

chipmaker Nvidia Corp.

Tesla Inc.. Inc..

and Meta Platforms Inc..

, the holding company of Facebook. Other key companies include drugmaker Johnson & Johnson and credit card company Mastercard Inc..

The US Earnings Index, on the other hand, suggests company names that may be more isolated. These include health insurer UnitedHealth Group Inc..

and telecom giant Verizon Communications Inc..

Large US-centric retailers like Home Depot Inc.

and Walmart Inc..

also make this list.

Write to Matt Grossman at [email protected]

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