Dollar Weakens: Potential Boost to S&P 500 Amid Tariff Concerns

The financial landscape is continuously shifting, and according to Goldman Sachs, a decline in the value of the dollar may provide a much-needed boost to S&P 500 earnings amidst rising tariff tensions. As discussions surrounding tariffs enter the foreground, businesses are increasingly concerned about how elevated trade barriers might affect their profitability. Currently, the trade-weighted dollar has experienced a decline of approximately 7% this year, with projections from Goldman indicating a further decrease of around 4% by the end of the year. This dip in the dollar value is significant as close to one-third of all S&P 500 revenues originate from international markets. Historical data suggests that a 10% decline in the dollar can lead to a roughly 23% increase in earnings per share, all else being equal. Technology companies may benefit the most from this trend, given that nearly half of the revenue for the Nasdaq 100 companies is derived from global sales, while the Information Technology sector alone reports over 50% of its sales from abroad. Moreover, while Goldman Sachs maintains an optimistic outlook for the U.S. economy, forecasting it to grow faster than many of its international counterparts in 2025 and 2026, there remains a substantial risk due to the projected rise in tariffs. Currently, those tariffs are expected to escalate to an effective rate of 19% by early 2027, posing a challenge for companies heavily reliant on international markets. In a time when securing supply chains is increasingly critical, fluctuations in currency values can serve as a strategic advantage for mitigating profit challenges. Although a weaker dollar may not fully counteract the adverse effects of tariffs, it can help alleviate some of the financial strain. As second-quarter earnings reports emerge, Goldman Sachs' outlook on the depreciating dollar supports its prediction that the S&P 500 could gain another 10% in the coming year. This article first appeared on GuruFocus.