50% of S&P 500 Companies Citing A Negative Impact From FX on Q3 Earnings Calls To Date

While the majority of S&P 500 companies will report earnings results for Q3 2022 over the next few weeks, 4% of the companies in the index (20 companies) have already reported earnings results for the third quarter (through October 6). Given current expectations for low, single-digit earnings growth for the third quarter and concerns about a prolonged recession, have these companies discussed specific factors that had a negative impact on earnings, revenues, or profit margins for the third quarter (or are expected to have a negative impact in future quarters) during their earnings calls?

To answer this question, FactSet searched for specific terms related to a number of factors (e.g. “currency,” “labor,” etc.) in the conference call transcripts of the 20 S&P 500 companies that conducted third quarter earnings conference calls through October 6 to see how many companies discussed these factors. FactSet then looked to see if the company cited a negative impact, expressed a negative sentiment (e.g. “volatility,” “uncertainty,” “pressure,” “headwind,” etc.), or discussed underperformance in relation to the factor for either the quarter just reported or in guidance for future quarters. The results for Q3 and a comparison to the same time period in Q2 are shown in the chart on page 3.

Labor costs have been cited by the highest number companies in the index to date as a factor that either had a negative impact on earnings, revenues, or profit margins in Q3, or is expected to have a negative impact on earnings, revenues, or profit margins in future quarters. Overall, 13 companies (or 65%) cited a negative impact from this factor. This number is consistent with the trailing four-quarter average for this factor of 13 through this same point in time in the earnings season.

Supply chain disruptions and costs have been cited by the second-highest number of companies in terms of a negative impact at 11 (or 55%). This number is also consistent with the trailing four-quarter average for this factor of 12 through this same point in time in the earnings season.

Unfavorable foreign exchange rates have been cited by the third-highest number of S&P 500 companies in terms of a negative impact at 10 (or 50%). However, this number is well above the trailing four-quarter average of 4 for this factor through this same point in time in the earnings season. In fact, the third quarter marked the fourth consecutive quarter that this number has increased and the first time in the past four quarters the number reflected at least 50% of the companies reporting at this point in time in the earnings season. Of the 12 factors tracked for this analysis, only higher interest rates witnessed a larger quarter-over-quarter increase in Q3 2022 relative to Q2 2022.

Given the strengthening of the U.S. dollar in recent months (as indicated by the rise in the U.S. Dollar Index) and the 40% international revenue exposure of the S&P 500 overall, it is not surprising to see an increase in the number of (early-reporting) companies citing a negative impact to earnings, revenues, or profit margins due to unfavorable foreign exchange rates. The market will likely continue to watch for more commentary on foreign exchange throughout the earnings season. Here are a few recent examples of S&P 500 companies citing a negative impact from foreign exchange on earnings calls.

The unfavorable impact of foreign exchange was reflected in the net sales decrease for our International segment.                   -Conagra Brands (Oct. 6)

Now turning to our 2022 financial outlook on slide 25. We are projecting strong top line growth with profit impacted by cost inflation and supply chain challenges. We also expect there will be a 3 percentage point unfavorable impact of currency rates on sales and a 2 percentage point unfavorable impact on adjusted operating income and adjusted earnings per share. -McCormick & Co. (Oct. 6)

Headwinds from foreign exchange have also shifted significantly in the last 90 days, as the trend of US dollar strengthening has accelerated. Based on current spot rates, net of hedging activity, we estimate the full-year negative impact of foreign exchange on reported revenue and EBIT to now be approximately $4 billion and $900 million, respectively, creating a wide divergence in constant versus real dollar performance. -NIKE (Sep. 29)

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