Why Strong U.S. Dollar Will Reduce U.S. Corporate Profits
In previous earnings seasons, the profits of mayor U.S. corporations have been held up by the weak dollar which has boosted the dollar value of foreign earnings. As the euro was earlier this year up 15% year over year against the dollar, this meant that even if the euro value of the European subsidiaries of companies like Coca Cola or McDonald's were unchanged, the dollar value of that would still rise by 15%.
Now with the U.S. dollar being higher than year ago levels against almost all other currencies except the yen and the yuan and the currencies that are pegged to the U.S. dollar (such as the Hong Kong dollar and the Saudi riyal), this effect will not only vanish, but also be turned into its opposite. Now the dollar value of foreign earnings will fall even if they are unchanged or slightly up in local currency terms. The effect will be even larger for exporters whose margins will be squeezed. To some extent however the effect will be counteracted by gains for importers.
Moreover, with most foreign economies weakening, the local currency value of these earnings will probably take a hit in most cases. The combined effect of these two factors means that the dollar value of earnings from foreign subsidiaries will start falling after having previously soaring. And as domestic earnings will continue to fall, this means that overall profits will decline.