Why a weak dollar is bullish for the tech industry
The relentless decline of the dollar in recent months has a silver lining for the tech rally in the stock market.
Why it matters: A declining dollar can be considered bullish for U.S. stocks, as it provides an earnings boost for globally exposed companies when they convert their international revenue into dollars on financial statements.
With tech and communication services now accounting for nearly half of the S&P 500's market cap, a rally in those sectors would almost certainly lift the broader index.
How it works: Take Apple, one member of the Magnificent 7 tech heavyweights, which get about 60% of their revenue outside the U.S.
Say Apple sells an iPhone for €1,000 in Europe. The company will then convert this sale into U.S. dollars when it reports earnings.
Today, €1 equals $1.17, so a €1,000 sale could convert to $1,170 in reported revenue. In this hypothetical, Apple didn't raise prices or sell more. It just benefits from a weaker dollar.
What they're saying: "People are really underestimating how good that weaker dollar is, particularly for tech," Max Kettner, the chief multiasset strategist at HSBC, tells Axios.
Yes, but: There's concern that an earnings beat driven by dollar weakness isn't real since it's not rooted in company fundamentals.
Some investors question the earnings quality of growth from currency conversions, which can change, rather than underlying financials, like increased revenue.
Zoom out: Kettner is pitching bullishness to clients.
One recent caller only wanted to discuss left-tail risk, the risk that you lose money. Kettner sees the larger risk on the right tail, where you lose out on making money.
"We could genuinely squeeze 10% higher over the next two or three months because the earnings are so strong," he says.
What to watch: Earnings season kicks off again in a few weeks. Tech earnings expectations for Q2 mirror Q1, with growth expected to be essentially flat.
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