U.S. dollar dominance tends to hurt these sectors of the stock market less, RBC says

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By Christine Idzelis

“We are seeing an increase in complaints from business executives about rising currency headwinds across most sectors of the S&P 500,” says RBC Capital Markets

The strengthening U.S. dollar is “clearly negative” for the S&P 500, but stocks in areas such as financials, utilities and real estate investment trusts appear more sheltered from the “slump” in historic strength. currency, according to RBC Capital Markets.

While the performance of U.S. stocks tends to be weak overall when the dollar strengthens, picking sectors that have generally weathered its rise better can help limit the pain of investment portfolios, said Lori Calvasina, head of US equity strategy at RBC Capital Markets. , in a research note on Monday.

“We are seeing an increase in complaints from business executives about rising currency headwinds across most sectors of the S&P 500,” Calvasina said. “But historically,” she said, trends in earnings-per-share revisions “are less sensitive to a stronger US dollar in sectors such as financials, utilities and REITs.”

By contrast, industries, materials, consumer staples and technology are the most sensitive to a stronger dollar, according to a chart from the RBC report. That’s based on data since 2004 that takes into account the sensitivity of earnings-per-share, or EPS, revisions among large-cap stocks.

While a stronger dollar is negative for the S&P 500, “U.S. equities still tend to enjoy safe-haven status in the broader global equity landscape,” according to RBC’s note.

“This could limit the decline in US equities on a relative basis, especially since most investors we’ve spoken to recently seem to agree that the US consumer is in better shape than the European consumer,” Calvasina said.

The ICE US Dollar Index, a measure of the dollar’s strength against a basket of rivals, has climbed more than 16% so far this year, FactSet data shows, when last checked. The dollar rises as the Federal Reserve aggressively raises interest rates to tackle the highest inflation in decades.

The U.S. stock market had a lousy September as investors grappled with rising rates and feared a hawkish Fed could trigger a recession. The Dow Jones Industrial Average and S&P 500 each suffered their worst monthly percentage declines since March 2020, when markets reeled from COVID-19 fears.

Last week, many US equity investors were also unsettled by the Bank of England’s surprise intervention in the UK bond market, stoking concerns about the stability of financial markets, according to RBC.

“The break below the S&P 500’s June 2022 low was also a psychological blow,” Calvasina said. “We continue to see 3,500 as a pivotal test for stocks.”

See:The stock market is about to take a big test: Watch this level of the S&P 500 if the 2022 low gives way, according to RBC

The S&P 500 rose 2.4% on Monday afternoon to around 3,671, while the Dow Jones jumped 2.5% and the Nasdaq Composite climbed just over 2%, according to data from FactSet, when last checked.

All three major benchmarks fell in September, with the Dow Jones dropping 8.8% in September, the S&P 500 dropping 9.3% and the tech-laden Nasdaq dropping 10.5%. This marked three consecutive quarters of losses for all three indices.

So far this year, the Dow is down about 19%, while the S&P 500 is down about 23% and the Nasdaq is down about 31% based on Monday afternoon trading. , according to FactSet data, when last checked.

Read: Stocks and bonds are ‘discounted for disaster’ after worst time for investors in 20 years

-Christine Idzelis

 

(END) Dow Jones Newswire

10-03-22 1412ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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