To The Moon

The U.S. dollar (USDOLLAR) $Invesco DB US Dollar Index Bullish Fund(UUP)$ will continue to see strength through at least the medium term, according to Citi$Citigroup(C)$ .

And while that may favor U.S. large-cap stocks( $SPY(SPY)$ $Invesco QQQ Trust(QQQ)$ $DJIA(DJIA)$) on the globalstage, it will also have an impact on earnings. With roughly 30% of revenues for U.S. companies generated overseas, according to Goldman Sachs$Goldman Sachs(GS)$ , the "strong dollar" may replace "supply chain issues" as the go-to excluse for missing consensus estimates.

"A stronger USD has been historically correlated with a lower frequency of sales beats," Goldman Sachs equity strategist David Kostin wrote in a note. (See chart below.)

"The trade-weighted US dollar rose by 9% vs. 3Q 2021, representing a headwind on the translation of overseas sales," Kostin said. "The move in FX means most firms will announce 3Q results in regular terms but will undoubtedly emphasize their performance on a 'constant currency' basis."

"The implied relationship between dollar strength and top-line results suggests that fewer S&P 500$S&P 500(.SPX)$  firms will beat consensus sales forecasts in 3Q compared with 49% in 1Q and 45% in 2Q 2022," he added.

Looking to the bottom line, a strong dollar tends to hit EPS further down the road, Citi said.

"Long-term correlations imply a rising dollar has a lagged impact on earnings of 3-6 months," Citi equity strategist Scott Chronert said. "The +11% rise in the trade weighted dollar in the past year could hit early 2023 index level earnings by -$15-20. This is well recognized in our 2023 S&P 500 EPS estimate of $215, but not in bottom-up consensus of $239."

Broad-market impact

"The strong US dollar can serve as a double-edged sword," Oppenheimer strategist Johns Stoltzfus said. "The currency’s strength offsets inflation in the US by reducing the cost of imported consumer goods at a time when consumer demand is strong."

"However, a higher dollar can create headwinds that can make US products and services less competitive overseas and negatively impact earnings of US multinational companies," he said. "For US investors looking to diversify their portfolio exposure into foreign markets dollar strength proffers the opportunity to pick up foreign asset exposure 'on the cheap.'"

If the dollar retreats, the benefits to the S&P 500 may not be as strong as the detriments of a rising greenback, Citi's Chronert said.

"Lower correlation and beta to a high but falling dollar implies that the S&P 500 may not benefit as aggressively if the greenback trend reverses," he said. "Essentially, upside from a weaker dollar may not match the pain felt from a rising dollar."

"Historically, it is more likely that a rising dollar will benefit Growth (IWF) over Value (IWD)," he added. "That is not the case of late as investors worry over dollar sensitives to Consumer Discretionary (XLY) and Information Technology (XLK) (which are heavy Growth weights). This relationship could change and turn more positive as further dollar strength likely signals more severe global growth fears, making the less traditionally economic sensitive Growth sectors more attractive again."

"Small Cap (IWM) relative to Large (IWB) is likely most misunderstood. Many believe that a strong dollar should benefit the more domestically oriented Small Caps. However, the relative performance correlation over time implies a weaker dollar tends to be better for the small size trade."

Focus on domestic sales

"Continued USD strength would support the performance of stocks with 100% domestic sales relative to those with a higher proportion of foreign sales," Kostin said.

"Since July, consensus has trimmed 3Q EPS for the median constituent of our Domestic Sales basket by 1% and left 2023 estimates unchanged," he said. "In contrast, 3Q EPS for the median International Sales basket constituent with 73% nonUS sales has been cut by 4% and 2023 estimates have reduced by 3%."

"The median (domestic) stock trades at a 12% P/E discount to the median (international) stock (vs. a long-term average of 5%) and offers slightly faster 2023 EPS and sales growth."

The stocks in the Goldman Sachs Domestic Sales basket by sector are:

Communication Services$Communication Services Select Sector SPDR Fund(XLC)$, % of non-U.S. sales sector median = 37%

• Charter Communications$Charter(CHTR)$, non-U.S. sales 0%
• Fox$Fox Corporation Class A(FOXA)$ , 0%
• T-Mobile$T-Mobile US(TMUS)$, 0%
• Verizon Communications$Verizon(VZ)$ , 0%
• Dish Network$DISH Network(DISH)$, 0%

Consumer Discretionary$Consumer Discretionary Select Sector SPDR Fund(XLY)$, median = 21%

• Dollar General$Dollar General(DG)$, 0%
• Chipotle$Chipotle Mexican Grill(CMG)$, 0%
• Ross Stores$Ross(ROST)$, 0%
• Target$Target(TGT)$, 0%
• D.R. Horton$D.R. Horton(DHI)$, 0%

Consumer Staples$Consumer Staples Select Sector SPDR Fund(XLP)$, median 27%

• Altria$Altria(MO)$, 0%
• Kroger$Kroger(KR)$, 0%
• Constellation Brands$Constellation(STZ)$, 3%

Energy$Energy Select Sector SPDR Fund(XLE)$, median 16%

• Devon Energy$Devon(DVN)$, 0%
• Pioneer Natural Resources$Pioneer Natural Resources(PXD)$, 0%
• Marathon Petroleum$Marathon(MPC)$, 0%

        Financials$Financial Select Sector SPDR Fund(XLF)$, median 7%

• Truist Financial$Truist Financial Corp(TFC)$, 0%
• CME Group$CME Group Inc(CME)$, 0%
• Charles Schwab$Charles Schwab(SCHW)$, 0%
• PNC Financials$PNC Financial Services Group Inc(PNC)$, 0%
• Capital One$Capital One(COF)$, 0%
• Wells Fargo$Wells Fargo(WFC)$, 0%

Healthcare$Health Care Select Sector SPDR Fund(XLV)$, median 39%

• Elevance Health$Elevance Health(ELV)$, 0%
• Centene$Centene(CNC)$, 0%
• AmerisourceBergen$AmerisourceBergen(ABC)$, 0%
• Quest Diagnostics$Quest Diagnostics(DGX)$, 0%
• CVS$CVS Health(CVS)$, 0%
• Humana$Humana(HUM)$, 0%
• DaVita$DaVita HealthCare Partners(DVA)$, 6%

Industrials$Industrial Select Sector SPDR Fund(XLI)$, 31%

• Southwest Airlines$Southwest Airlines(LUV)$, 0%
• Norfolk Southern$Norfolk Southern(NSC)$, 0%
• Republic Services$Republic(RSG)$, 0%
• CSX$CSX Corp(CSX)$, 0%

Info Tech$Technology Select Sector SPDR Fund(XLK)$, median 54%

• Paycom$Paycom(PAYC)$, 0%
• Tyler Technologies$Tyler(TYL)$, 0%
• Jack Henry$Jack Henry & Associates(JKHY)$, 0%
• Paychex$Paychex(PAYX)$, 1%
• Intuit$Intuit(INTU)$, 5%
• CDW$CDW Corp(CDW)$, 12%
• Broadridge Financial$Broadridge Financial Solutions(BR)$, 12%
• ADP$Automatic Data Processing Inc(ADP)$, 13%
• Fiserv$Fiserv(FISV)$, 14%
• Enphase Energy$Enphase Energy(ENPH)$, 20%
• Global Payments$Global Payments(GPN)$, 21%
• Roper Technologies$Roper(ROP)$, 22%
• Fidelity National Info$Fidelity National Information(FIS)$, 26%
• Cognizant Tech$Cognizant Technology Solutions Corp(CTSH)$, 26%

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