Stocks, ETFs, and Equities Macro · Sector Rotation and Macro

The dollar's effect on multinationals

Q: DXY rallies 8 percent over three months. Which group is most likely to outperform?

Right. Small caps earn dollars and spend dollars. The translation headwind that hurts multinationals barely touches them.

Explain how a stronger or weaker US dollar (DXY) affects US multinationals and domestic-focused firms differently.

3 min read+25 XPLesson 36 of 55

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Stocks, ETFs, and Equities Macro

Sector Rotation and Macro

Lesson 36 of 5565%

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Lesson 36 of 55Stocks, ETFs, and Equities MacroSector Rotation and Macro

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Explain how a stronger or weaker US dollar (DXY) affects US multinationals and domestic-focused firms differently.

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Strong dollar, weak multinationals

Roughly 40 percent of all revenue generated by S&P 500 companies comes from outside the United States. Apple sells iPhones in Europe and Asia. Coca-Cola sells drinks in Latin America. Caterpillar sells equipment in Africa and the Middle East. When those companies report quarterly earnings in US dollars, every euro, yen, and real has to be translated back into dollars. The exchange rate at the moment of translation matters enormously.

Here is the mechanism. Imagine Coca-Cola earns 100 euros of profit in Germany. If the euro is worth $1.20, that becomes $120 on the consolidated income statement. If the euro falls to $1.00 because the dollar got stronger, that same 100 euros now becomes only $100. The actual business in Germany did not change. The headline earnings just shrank by 17 percent because of translation. Multiply by every multinational in the S&P 500 and you get a measurable earnings drag during dollar-strength regimes.

Wick saysWhen the dollar gets stronger, the same 100 euros of profit turns into fewer dollars.

The dollar is tracked by the DXY index, which weighs the dollar against a basket of six currencies — euro, yen, pound, Canadian dollar, krona, and franc. When DXY rises, US multinationals face a translation headwind. When DXY falls, they get a translation tailwind that flatters earnings. The 2022 dollar surge to a 20-year high was a major factor in mega-cap earnings disappointment that year. The 2023-2024 dollar weakness reversed it.

Wick saysWhen the dollar rallies, domestic small caps often hold up better than big multinationals.

Sector matters. Technology, Industrials, and Materials carry the largest international revenue exposure — they take the biggest hit from a strong dollar. Financials, Utilities, and Real Estate are mostly domestic and are barely affected by FX. As a practical move, watch DXY in a small panel on your equity dashboard. If you trade mega-cap tech or industrials, a 5 percent move in DXY is a 5 percent move in your trading environment.

Wick saysAbout 40% of S&P 500 sales come from abroad, and tech, industrials and materials feel it most.

Recap: roughly 40 percent of S&P 500 revenue is foreign. Strong dollar shrinks it on translation. Tech, industrials, and materials are most exposed. Small caps and domestic-focused names are insulated.

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1. DXY rallies 8 percent over three months. Which group is most likely to outperform?

2. Roughly what share of S&P 500 revenue is generated OUTSIDE the United States?

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