From this article, we will discuss 10 stocks analysts are downgrading after weak earnings reports. To take a look at some more stocks that have been downgraded. Record shows that as of July 22, the S&P 500 is posting its lowest earnings growth on a year-over-year basis since the fourth quarter of 2020.The lower earnings growth rate for Q2 2022 compared to the recent quarters happened as a result of a tough reference to the extremely strong earnings growth in Q2 2021 and ongoing economic challenges.
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Investors are looking at the numbers with keen interest as the US economy is engulfed by inflation at a multi-decade high and multiple interest rate hikes. Furthermore, the US dollar gaining strength against the major currencies of the world is also playing a significant role in denting the earnings of numerous corporations. Till July 8, it was widely believed on Wall Street that the majority of businesses were successfully generating sizable profits from healthy revenues.According to Refinitiv, the consensus estimate for S&P 500 businesses was projected at a 10.6% increase in revenue from Q1 2021 and a 5.7% rise in earnings in Q2. However, a closer look would reveal that most of these earnings are anticipated to come from the energy sector. The situation quickly becomes gloomy if results from energy businesses are excluded. The average estimations would be lowered to a rise of 6.6% in revenue from the same period last year. Meanwhile, the earnings would be forecasted to decline by 3% in the second quarter of 2022.
In the last year, the US dollar index has gained 15.1% against a basket of other prominent currencies of the world as the Federal Reserve has taken a hawkish stance to fight inflation by hiking benchmark interest rates thrice since the start of 2022.
This makes the exports made by US entities less competitive in the foreign markets, adversely impacting the top line and bottom line of the multinational companies that convert their foreign revenue and earnings into the US dollar. According to Morgan Stanley, for each 100 basis points (bps) YoY rise in the US Dollar Index, the earnings growth of the S&P 500 companies falls by 50 basis points. As energy prices have started to take a breather after a turbulent first half of the year, the US dollar gaining strength is not providing a break to companies.
According to FactSet, around 40% of the revenues of the S&P 500 companies are generated from outside the US.The information technology (IT) sector and the materials sector have the highest exposure to exchange rate fluctuations as they generate 58% and 56% of their revenue, respectively, from outside the US. During this earnings season, International Business Machines Corporation (NYSE:IBM), Johnson & Johnson (NYSE:JNJ), and Netflix, Inc. (NASDAQ:NFLX) have all quoted the US dollar gaining strength as a headwind to their earnings.
It must be noted that Johnson & Johnson (NYSE:JNJ) and Microsoft Corporation (NASDAQ:MSFT) had already lowered their second quarter guidance to incorporate the impact of the rising US dollar. Some of the notable stocks that have received a downgrade in ratings following weak earnings reports include Delta Air Lines, Inc., AT&T Inc., and Snap Inc.
