King Dollar: A New Threat to Big Tech Earnings

The US dollar has been on a record run, and while this has been beneficial for the US economy, it has posed a significant threat to the earnings of Big Tech companies. The strong dollar has a direct impact on the international earnings of these companies, as their foreign earnings are converted back into dollars at a lower value. This effect, known as currency headwinds, can significantly reduce the value of these companies' overseas earnings.

Microsoft, for example, reported a stunning negative effect from currency exchange rates in its fiscal 2023 first-quarter earnings. Total revenue increased 11% year over year to $50.1 billion, but backing out the effects of currency exchange rates, revenue would have increased 16%. This means that the strong dollar took a hefty five-percentage-point toll on Microsoft's revenue growth (Source: The Motley Fool, 2025-02-08).

The impact of currency fluctuations is even more pronounced on profit margins. Microsoft's expenses are primarily made in US dollars, while its revenue is collected in various foreign currencies. When the dollar strengthens, the effect is an even larger reduction in profitability. In Microsoft's case, the dollar took a nine-percentage-point cut from operating income, lowering year-over-year operating profit growth to 6% (Source: The Motley Fool, 2025-02-08).

Apple is another company that has been hit by the strong dollar. In May 2022, Apple's chief financial officer, Luca Maestri, stated that the rising dollar was expected to be a nearly 300-basis-point headwind to the company's year-over-year growth rate (Source: The New York Times, 2022-05-03).

The Federal Reserve's interest rate policies have played a significant role in the strength of the US dollar. When the Federal Reserve raises interest rates, it makes borrowing more expensive, which can lead to a stronger US dollar. This is because investors seek higher returns in the US, leading to increased demand for US dollars. For example, in 2022, the Fed raised interest rates by 75 basis points, the biggest increase since 1994, which contributed to a record run-up in the US dollar (Source: The Motley Fool, 2025-02-08).

As the Federal Reserve continues to raise interest rates, the US dollar is expected to remain strong, which could continue to negatively impact the earnings of Big Tech companies. However, it's important to note that these currency headwinds are expected to be temporary, and at some point, the dollar's strength may dissipate or even reverse, which would be a boost to these companies' revenue and profits (Source: The Motley Fool, 2025-02-08).

In conclusion, the strong US dollar has emerged as a fresh threat to Big Tech earnings. The impact of currency fluctuations on international earnings and profit margins is significant, and the Federal Reserve's interest rate policies have played a crucial role in the strength of the US dollar. While these currency headwinds are expected to be temporary, Big Tech companies must remain vigilant and adapt their strategies to mitigate the effects of a strong US dollar.