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Listed companies' earnings and foreign exchange rates: currencies will play a decisive role in 2015


According to our internal scenario, the average exchange rate for the euro against the dollar will likely amount to $1.05 in 2015 and $1.00 in 2016, after averaging $1.33 in 2014.

As the S&P 500 and EURO STOXX 50 are two highly international indices, with percentages of foreign sales (outside the monetary zone) that amount to 36% and 45% respectively, this will certainly impact results. According to our estimates, the aggregate earnings of the EURO STOXX 50 will likely jump by 22% in 2015, of which 14% is due to the foreign exchange effect alone. Meanwhile, this rebound is unlikely to be a flash in the pan: it should continue into 2016 (+12%). At the same time, S&P 500 earnings could decline by 5% in 2015, before recovering by 9% in 2016.





Equity market valuations have increased significantly on both sides of the Atlantic and the prospects of a further rise of the multiples are now limited, particularly in the US where a slow normalisation of monetary policy is beginning to take shape. Apart from significant re-rating, corporate earnings growth will be a crucial factor. It is in this context that the steep rise in the dollar, which has appreciated by 17% against a basket of currencies and 29% against the euro since last 30 June, is particularly significant.

The purpose of this note is first and foremost to review the impact these currency changes will likely have on the two leading indices in the eurozone and the US: the EURO STOXX 50 and the S&P 500. The conclusions are incontrovertible: in 2015, the eurozone's aggregate earnings will be boosted by 14% by the foreign exchange effect alone, whereas the S&P 500's will be dragged down by 7%.

Meanwhile, three other factors will also impact earnings: the economic climate, oil prices and progress made in normalising the banking sector. Both indices will benefit from the continued slight improvement in the economic climate, but will also suffer from the steep drop in contributions from the energy sector. Finally, from a much lower starting point, the rebound in banks' earnings will be much more dramatic in the eurozone. Between these different factors, we are betting on a 22% increase in net earnings for the EURO STOXX 50 versus a 5% decline for the S&P 500.

Steep depreciation of the euro

After remaining relatively stable since the start of the financial crisis, the euro has fallen dramatically since central bankers met at Jackson Hole in August last year. At the symposium, the Fed Chair admitted that "increases in the federal funds rate target could come sooner than the Committee currently expects". Meanwhile, the ECB President pointed to deflation risks, opening the door to a large-scale quantitative easing programme, the broad terms of which were announced on 22 January. This divergence between the two central banks pushed the dollar upward and the euro downward. The euro was worth $1.32 at the time of the Jackson Hole symposium and was only worth $1.07 at the beginning of April 2015. For 2015 and 2016, we predict respective average exchange rates of $1.05 and $1.00, compared to $1.33 in 2014.

To assess the foreign exchange impacts on the EURO STOXX 50 and the S&P 500, we must expand the approach to other currencies and consider the effective exchange rate. The euro's decline compared to this basket of currencies is certainly less dramatic than against the dollar, due to the simultaneous decline of the yen and a number of emerging currencies. However, for the first time since the start of the crisis, eurozone companies will benefit from a competitive currency. We must not forget that from September 2008 to the end of 2014, despite a double recession compared to a single recession in the US, the average exchange rate for the euro stood at $1.34. In contrast, US companies will have to deal with a dollar at a 12-year high against all currencies.

With the companies making up the EURO STOXX 50 and S&P 500 respectively earning 45% and 36% of their sales outside their monetary zone (in the strictest sense of the term), these exchange rate fluctuations will play a decisive role in terms of both sales, earnings and distribution. 

In reality, effectively estimating foreign exchange effects, which are sometimes provided by companies, is a complex task because it involves many supplementary questions, such as the denomination of balance sheet debts, exchange rate hedging, transaction effects (domestic production) and conversion (foreign production) as well as competitiveness gains eventually passed on to increase sales.

From the outside, to simplify things, we generally use two types of methods to assess the foreign exchange effects: regressions or aggregations. Although regressions are often used and are easy to apply (or is it because they are easy to apply?), we believe their explanatory power is weak and their conclusions insubstantial. That is why we prefer to aggregate the intermediate balances of an index's various components, then testing their sensitivity. In any case, given that financial sector accounts are specific, they call for a separate analysis.

The case of the EURO STOXX 50:

Aggregate sales for the EURO STOXX 50 amounted to €2.74 trillion in 2014, of which €2.004 trillion were from non-financial companies and €736 billion from the financial sector. Meanwhile, 45% of these sales were made outside the eurozone, including 12% in the US but also 7% in the rest of Europe and 9% in emerging Asia where, between the pound sterling, the Swiss franc and the yuan, most currencies increased signifi cantly against the euro.

In terms of sales, the EURO STOXX 50's gross exposure outside the eurozone—excluding Financials—may therefore be estimated at €902 billion (45% of €2.004 trillion). To go from gross to net, we need to account for production carried out abroad and purchases in foreign currencies. In practice, on average companies' net exposure represents half of gross exposure. By applying this ratio to the EURO STOXX 50, we reach a net exposure of €451 billion (50% of €902 billion).

For 2015, we are betting on an average depreciation of the euro of 12.1% in the effective exchange rate, including a 21.1% decline against the dollar ($1.05 versus $1.33). All other things being equal, sales outside the eurozone will therefore be inflated by 13.8% as a whole (sales in year N+1= sales in year N/(1-0.121) and by 26.7% for its share in dollars (sales in year N+1= sales in year N/(1-0.211). Depending on the euro's effective exchange rate, the impact on 2015 sales will therefore amount to +€62 billion (13.8% x €451 billion), of which  half may be passed on in order to preserve or grow market share. The additional earnings would then amount to +€31 billion before taxes, then +€21 billion after deducting 33% in tax. This is equivalent to 14% of the aggregate net earnings of the EURO STOXX 50 in 2014, which amounted to €152 billion, of which €114 billion was for non-financial companies and €38 billion for financials. 

In addition to this +€21 billion foreign exchange effect, we should add increased earnings related to an improving economic climate and also take into account the rebound in financials in particular. Conversely, we will deduct the decline in oil company earnings related to the drop in oil prices. The calculation steps are summarised below:

  • additional earnings growth related to an improved economic climate is estimated at +€3 billion, or the EBITDA margin (20%) after deducting taxes of 33%, or 13.4%, multiplied by the change in sales (1% of €2.004 billion, or +€20 billion)
  • the rebound in financials' aggregate earnings in 2015 is estimated at +€15 billion according to the IBES (or €52 billion versus €37 billion, up 40%) of which +€7 billion is accounted for by BNP alone (US fine in 2014) and +€7 billion between Banco Bilbao, Santander, Deutsche Bank, Intesa and Société Générale.
  • finally, with regard to oil companies, the drop in oil prices will likely drag down the EURO STOXX 50's adjusted earnings by slightly less than €6 billion (€10.3 billion versus €16 billion, down 36%).

In the end, between the foreign exchange effect (+€21 billion), the cyclical effect (+€3 billion), the rebound among financials (+€15 billion) and the drop for oil companies (-€6 billion), the EURO STOXX 50's cumulative earnings should rebound by +€33 billion, an increase of 22% versus 2014, compared to +7% according to the Factset aggregate consensus of +9% based on the IBES EPS. As such, whereas since 2008 we have been systematically 10% to 15% under the consensus estimate, we are now above it, which augurs well for a rebound in EURO STOXX 50 earnings. We are also more optimistic than the consensus in terms of dividends. Although the consensus expects 2015 dividends to be stable (+0.9%), we foresee a further increase of 5%. While the context is improving, it is unlikely that dividends will cease to increase—especially considering that, given our forecast of sustained earnings growth, the corresponding payout ratios will hit their lowest levels in a decade. Meanwhile, this rebound in EURO STOXX 50 earnings is not likely to be a fl ash in the pan, but should continue into 2016 (+12%). Although the foreign exchange effect will likely decrease by 80%, the leverage effect related to the economic recovery and the contribution of the energy sector (after declining by 50% since 2012) should begin to grow.

The case of the S&P 500:

For its part, the aggregate sales for the S&P 500 increased to $10.86 trillion in 2014, of which 36% was outside the US and up to $9.407 trillion was attributed to non-financial companies.

In terms of sales, the S&P 500's gross international exposure—excluding financials—may therefore be estimated at $3.387 trillion (36% of $9.407 trillion) and net exposure at half that amount, $1.693 trillion.

For 2015, we expect average growth of 13.4% in the dollar's effective exchange rate. All other things being equal, the S&P 500's international sales will therefore be reduced by 11.8% (sales in year N+1= sales in year N/(1-0.134). At first glance, the negative impact on 2015 sales will therefore be a $200 billion decline (11.8% x $1.693 trillion) of which half may still be offset by price increases. The "additional" earnings would then amount to -$100 billion before taxes, then -$67 billion after deducting taxes of 33%. This is equivalent to 7% of the aggregate net earnings of the S&P 500 in 2014, which amounted to $974.4 billion, of which $780.6 billion was for financial companies and $193.8 billion for other companies.

In addition to this foreign exchange effect of -$67 billion, there is:

  • additional earnings growth related to an improved economic climate, which is relatively greater than in the eurozone, with +$24 billion or the EBITDA margin (25%) after deducing 33% in tax, or 16.8%, multiplied by the change in sales (+1.5% of $9.407 trillion, or +$141 billion)
  • a rebound in financials estimated at $23 billion according to Factset ($217 billion versus $194 billion in 2014, up 12%). In relative terms, this is much lower compared to financials in the EURO STOXX 50 (+40%), for which the comparison base was much easier, with a 2014 net margin of only 5.1% compared to 13.3% for their S&P 500 counterparts.
  • finally, with regard to oil companies, the drop in oil prices will likely drag the sector's adjusted earnings down by 35%, bringing it to $60 billion versus $93 billion in 2014, a $32 billion decline.

In the end, the S&P 500's aggregate earnings will likely decline by $53 billion, or 5% compared to 2014, versus +2% according to the Factset aggregate consensus, +1% for the IBES EPS and +22% for the EURO STOXX 50. In this context, the increase in S&P 500 dividends, after rising by 12.5% in 2014, may drop to +4% in 2015 rather than the +9% anticipated by the consensus estimate.

In conclusion

Primarily due to exchange rates, the EURO STOXX 50's aggregate earnings should increase by 22% in 2015, whereas the S&P 500's will likely decline by 5%. This divergence, only partially anticipated by the consensus estimate, is particularly significant in that it marks the first time since 2008 that earnings in the eurozone recovered more quickly than in the US. Meanwhile, this rebound is unlikely to be a fl ash in the pan: it should continue into 2016 (+12%). Looking beyond how precise the figures are, which is often an illusion, the important thing to keep in mind is that there are many factors that suggest an imminent and sustained rebound in EURO STOXX 50 earnings. In this context, which puts the rise in multiples into perspective, the rotation back into eurozone equities may continue for some time.




With valuations tightening, earnings growth is becoming a crucial factor
















The drop in the euro benefits eurozone profits









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Ibra WANE, Strategy and Economic Research at Amundi
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Listed companies' earnings and foreign exchange rates: currencies will play a decisive role in 2015
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