Does Dollar Strength Still Move S&P 500 Returns?

Old-school vs. now: does a strong dollar still matter for S&P 500 investors?

Old-school playbook said the dollar didn’t really move the needle for broad U.S. equities. You focused on domestic demand, margins, maybe oil, and called it a day. FX was a stock-picker’s headache, not an index problem. Here’s the thing: that world’s kind of gone. The S&P 500 today is packed with mega-cap multinationals that price globally, source globally, and report in dollars. A stronger greenback now leaks into reported earnings, and, occassionally, into the multiple investors are willing to pay, way more than it used to.

Look, I get it: “It’s the S&P 500, it’s America.” But the revenue isn’t. FactSet reported in 2023 that roughly 40% of S&P 500 sales came from outside the U.S., which means translation and transaction effects are not rounding errors anymore. And concentration matters. In 2024, S&P Dow Jones Indices showed the top-10 names made up about one-third of the index by weight, with many of those companies earning a big chunk of revenue overseas. When those giants hedge less perfectly or have real pricing power abroad, dollar moves show up, fast, in GAAP numbers and guidance. I might be oversimplifying, but you get the point.

Quick stat: In 2022, Goldman Sachs estimated that a 10% appreciation in the U.S. dollar shaved roughly 3% off aggregate S&P 500 EPS, all else equal. That’s not life-or-death, but it’s not nothing.

Why should 2025 investors care? Because the dollar has stayed firm this year. Higher-for-longer rate expectations and safe-haven flows, think sticky U.S. real yields and choppy global growth headlines, have kept the USD bid. As I mentioned earlier, that kind of backdrop can mute overseas revenue when you translate it back into dollars and can pressure valuations if the strong USD comes bundled with higher real rates. That combo tends to lean on multiples, even if earnings hold up.

So, what are we doing here? We’re updating the mental model. The “ignore FX at the index level” approach was fine when domestic exposure dominated and concentration was lower. In the modern S&P 500, the dollar is an earnings lever, and when it tightens global financial conditions, it can become a valuation lever too. This actually reminds me of the mid-2010s playbook, different cycle, similar FX math, but that’s just my take on it.

Here’s what you’ll pick up in the next few minutes:

• The traditional view: Why old-school investors shrugged at FX and focused on domestic fundamentals and the Fed.
• The modern reality: How a higher overseas revenue share and mega-cap global pricing power make USD moves show up in reported earnings and, sometimes, in multiples.
• 2025 context: With the dollar firm this year on rate differentials and safe-haven demand, what that could mean for S&P 500 EPS, sector winners/losers, and where hedging (or not) matters.

Anyway, if you own the index, you own the currency sensitivity, whether you like it or not. Actually, let me rephrase that: you own a portfolio where FX isn’t the headline, but it’s definitely in the footnotes that move the headline.

How a stronger dollar hits (or helps) returns: the earnings and multiples loop

Here’s the thing: there are two main pipes where FX runs through P&Ls, translation and transaction, and they’re not the same animal. Investors mix them up all the time. When the dollar pops, both can matter, but the timing and magnitude are different.

Translation effects are the mechanical ones. You sell €100 of software in Paris, you translate it back to fewer dollars when USD appreciates. That lowers reported revenues and earnings even if the local business didn’t change at all. With the S&P 500 still getting a big chunk of sales abroad, this math isn’t trivial. FactSet’s geographic revenue work pegged S&P 500 foreign revenue share around 40% in 2023, and it’s been in the high-30s to low-40s range for much of the last decade. So when the dollar firms, reported EPS can soft-pedal what’s happening on the ground, pure currency translation.

Transaction effects are the operating ones. Costs and prices live in different currencies, and that can squeeze or boost margins. A U.S. pharma company that prices in dollars but pays euro-based researchers could see better margins when the euro weakens, while a U.S. equipment maker that competes with yen-priced rivals might have to eat discounts or lose volume when USD strengthens. It’s messy, company-specific, and, you know, it hits with a lag because hedges roll off and procurement cycles aren’t overnight.

A simple rule-of-thumb that showed up in a lot of sell-side work from 2015-2022: a 10% move in the broad USD tends to swing S&P 500 EPS by roughly 2-3%. Company mix matters, a consumer staples giant with 60% overseas exposure feels more than a domestic utility. If I remember correctly, Tech and Staples screens often came out near the top for FX sensitivity because of 40-60% foreign revenues (FactSet sector breakdowns in 2022-2023 put large-cap Tech near the high end). Don’t tattoo 2-3% on your wrist, but it’s a decent base case for models.

Valuation angle, this is where it loops back into returns. When dollar strength looks persistent (not just a two-week spasm), the market occassionally re-rates. We’ve seen investors rotate toward domestic, rate-sensitive sectors, think Utilities, regional banks, some REITs, on the logic that their cash flows are in dollars and, frankly, they’re less exposed to translation hits. At the same time, global exporters, Industrials, Semis, some Software and Consumer names, can see multiples compress a turn or two as the street bakes lower reported growth and a little margin risk into the price. The effect isn’t always huge, but it stacks on top of the earnings headwind, so price and EPS can both bend the same way.

Now, 2025 context. The dollar’s been firm this year on rate differentials and safe-haven demand tied to geopolitical flare-ups. I’m not making a heroic call on where DXY ends in Q4, but the setup still argues for cautious FX assumptions in models. Practically: if you own exporters, push a modest translation haircut into FY25-FY26 EPS, check your margin sensitivities on COGS and opex currencies, and, this is underrated, read the footnotes on hedge tenors. I’ve seen too many models forget that a 6-12 month rolling hedge delays the pain (or the benefit). Back on a trading desk in 2016, I watched a machinery name beat on margin for two quarters while the dollar was ripping, only to guide down when hedges rolled off. Same playbook occassionally shows up now.

Bottom line: translation drags reported numbers, transaction shifts margins, and if the FX move looks sticky, multiples adjust. Put a 2-3% EPS sensitivity per 10% USD into your top-down S&P math, then layer sector and company specifics. Look, I get it, FX isn’t why most people buy stocks. But ignore it and you’ll miss the quiet stuff that recieves the blame on the earnings call.

Recent playbook: 2022 shock, 2023 breather, 2024 resilience, 2025 still firm

So, 2022 was the body check. The dollar’s broad DXY index peaked around 114 in late September 2022 (intraday highs were roughly 114-114.8), and you felt it in earnings season. Multinationals lined up to flag FX headwinds, especially the mega-cap techs and staples with big EMEA exposure. Here’s the thing: when the S&P 500 gets a big chunk of sales abroad, translation isn’t a rounding error. S&P Dow Jones Indices reported foreign revenue share at about 40% for S&P 500 companies in 2022, which is why that USD spike bit into reported growth. As I mentioned earlier, every 10% up-move in the dollar tends to nick 2-3% off aggregate EPS, and 2022 gave you the template in real time.

In 2023, the dollar cooled off from those extremes. DXY spent most of the year well below the 2022 peak and finished around the 101 handle in December. FX pressure eased across a bunch of sectors, think semis, software, industrials, just as AI-led growth stole the show. You could see it in the tape: multiple re-rating on the AI leaders helped mask the translation give-back. Not zero FX pain, but the tone on calls shifted from “FX is killing us” to “FX is manageable.” Honestly, sentiment did more work than currencies for a while.

Then 2024 rolls in and, look, the USD didn’t melt. Rate differentials and geopolitical risk kept a bid under the greenback. DXY mostly chopped in the 103-107 range through the year, which is still strong versus the late-2010s average in the mid-90s. Earnings commentary reflected that: less triage, more steady-state FX talk. Companies with disciplined pricing and diversified cost bases held margins, while unhedged importers felt COGS creep. The market learned to live with a sturdier dollar rather than a runaway one.

And 2025 (so far)? Still firm. We’re in September and the dollar remains elevated versus pre-2020 norms as markets price higher-for-longer policy and uneven global growth. The U.S. data has stayed relatively resilient, while parts of Europe and China have been mixed, which keeps the USD supported. That probably means: modest translation drags in Q3/Q4 prints, selective margin pressure where inputs are dollar-denominated, and, this is important, less multiple expansion use from FX than we had in 2023. I’m not trying to be dramatic, but the bar for FX to “help” is higher right now.

Anyway, the tape and earnings seasons from the last few years gave us a simple map:

• 2022: Shock. DXY ~114 peak; widespread FX headwinds; high foreign sales (about 40% in 2022) magnified the translation hit.
• 2023: Breather. DXY cooled, ended near ~101; FX headaches eased; AI-driven revenue/expectations did the heavy lifting.
• 2024: Resilience. USD stayed strong vs late-2010s; rate gaps and geopolitics supported the bid; companies adapted.
• 2025 YTD: Still firm. Higher-for-longer and uneven global growth keep USD elevated vs pre-2020 norms; expect small but sticky EPS haircuts.

Quick aside: I remember a Q4’22 call where a CFO said, “FX shaved 300 bps off growth; underlying demand is fine.” The stock dropped anyway because, you know, reported is what screens see.

Look, I get it, FX isn’t the headline. But the pattern’s been telling us the same story for three years running: don’t model a soft-dollar tailwind until the rate picture or global growth gap actually changes. And when it does, you’ll probably hear it in guidance language first.

Who wins, who worries: sectors and styles when the dollar’s on top

Here’s the thing: company-level exposure still trumps the label on the tin. But when the USD stays firm like it has this year, DXY hanging in that low-to-mid 100s range, some patterns keep repeating.

• More sensitive to a strong USD: Tech megacaps with giant overseas footprints; staples and healthcare multinationals; industrial exporters; and a good chunk of materials. The translation math hasn’t changed. S&P Dow Jones Indices reported that S&P 500 companies generated about 40% of sales from outside the U.S. in 2022, so reported revenue gets nicked when the dollar rises. And, yes, pricing and hedging help, but the headwind is real.
• Less sensitive or potential beneficiaries: Small caps with domestic revenue bases (FTSE Russell data in 2023 showed the Russell 2000 gets around 80% of sales from the U.S.), utilities (almost entirely domestic for most names), and select domestically-focused financials and business services. If your customers and costs are in dollars, you probably sleep better when the greenback is strong.

Why it bites (and where)

Translation effects hit reported top-line first, then drip into margins if you don’t have pricing latitude. In 2022, when the dollar ripped, sell-side tallies often pegged the S&P 500 EPS drag around 3-4% for a 10% USD move. It varies by sector: staples, healthcare tools, and software with 50%+ foreign mix can see high-single-digit revenue haircuts in tough FX years, even if end-demand is fine. I’ve seen CFOs say “underlying growth is intact” and still get a stock down 5% because, you know, the screen reads reported numbers.

Commodity angle

Stronger dollar, all else equal, pressures dollar-priced commodities. Over long stretches, oil and copper tend to trade with a negative beta to the DXY. In plain English: a firmer buck usually leans on Brent and base metals. Ballpark, a sizable dollar up-move can shave around 7% off commodity benchmarks unless supply shocks dominate (think OPEC+ cuts or mining disruptions). That’s a headwind for Energy and Materials, though refiners and niche chemicals can occassionally offset with spread dynamics.

Styles and geographies

Look, I get it, this might be getting complicated. But one style pattern has been pretty consistent in strong-dollar regimes: quality and domestic tilts tend to hold up better than high-foreign-exposure growth or deep cyclicals. In 2022, when the DXY finished the year materially higher than 2021, MSCI EM fell roughly 20% while the S&P 500 declined much less, underscoring how a strong USD tightens financial conditions for emerging markets. EM equities typically face a tougher backdrop when the dollar is bid; funding costs rise and local FX hurts USD returns.

How to tilt, practical, not dogmatic

• Favor domestically-oriented small caps, utilities, and U.S.-centric financials/services while the USD stays firm.
• Be selective in megacap tech and global staples/healthcare: prioritize companies with strong pricing power, natural hedges, or cost bases aligned with revenues.
• Treat Energy/Materials as more tactical unless you have a supply-shock thesis that can overpower the FX drag.
• From a style lens, lean toward quality balance sheets and domestic revenue tilts. Keep EM exposure measured; currency can swamp otherwise solid fundamentals.

Anyway, labels aren’t destiny. If a “domestic” company quietly gets 35% of sales from Europe, the FX narrative still finds you. Flip side: a multinational with disciplined pricing and cost matching might be fine. The sorting hat is in the footnotes, and in guidance language later this year.

Your 2025 playbook: hedges, tilts, and what’s actually worth doing

Look, timing FX perfectly is a magician’s trick. We’re not doing that. We’re sizing risk, keeping costs visible, and letting the dollar story inform tilts, without turning the portfolio into a currency prop desk.

• Rebalance toward domestic revenue if USD stays firm: If the dollar remains bid into year-end, nudging weight toward companies that sell mostly in the U.S. makes sense. FactSet’s 2023 breakdown shows the S&P 500 still gets roughly 40% of revenue from outside the U.S., but that’s wildly uneven by sector. The idea isn’t all-or-nothing; it’s 2-3% tilts at the margin, especially in names with limited pricing power in Europe/Japan.
• Use disclosures and factor screens for FX sensitivity: Two quick hacks I actually use: (1) geographic revenue in 10-Ks/10-Qs and earnings decks (management usually gives a revenue-by-region pie), and (2) a factor screen that ranks names by foreign sales share and historical beta to DXY. As a rule-of-thumb, a higher foreign sales mix + low pricing power = higher FX sensitivity. And yes, confirm in the footnotes, always.
• If you own international stocks, consider hedged share classes/ETFs: Currency-hedged MSCI EAFE beat unhedged by about 7-8 percentage points in 2022 during the big USD surge (MSCI data, 2022). That’s what hedging is supposed to do: reduce FX volatility. Trade-off: higher expense ratios (often +0.10% to +0.30%) and tracking differences. Carry matters too in 2025: hedging EUR to USD costs roughly 1%/yr given rate differentials right now, while hedging JPY to USD actually pays you roughly 4-5%/yr because U.S. rates exceed Japan’s. Costs and carry swing, don’t ignore them.
• Earnings season checklist:
  • FX lines in guidance (constant-currency vs reported growth).
  • Pricing power: do they offset FX with price? Watch gross margin talk closely.
  • Regional demand: EMEA vs Americas mix, and how Asia is trending. Upgrades/downgrades usually lag FX by 1-2 quarters. It’s not perfect, but it’s a pattern.
• Risk control over hero trades: Set guardrails, position limits (e.g., single-name max 4-5%), stop-loss bands you actually stick to, and a currency budget so FX doesn’t accidentally become your largest bet. No binary “dollar up/down” gambles; skew the odds with sizing instead.
• Taxes/fees matter, annoyingly: For U.S. investors, FX forwards often fall under Section 988 (ordinary income/loss), while regulated FX futures can get 60/40 blended capital gains under Section 1256. That tax difference can swamp a 50-75 bps edge if you trade a lot. Hedged ETFs pass through expenses and occassionally hedge slippage; add the expense ratio when you decide if the hedge is worth it. You don’t want to pay nickels every month to maybe save pennies.

How strong dollars hit earnings, keep it simple: Historically, sell-side work (Goldman Sachs, 2015) estimated that a 10% USD appreciation knocks ~3-4% off S&P 500 EPS, concentrated in multinationals. The magnitude changes, but the direction hasn’t. Earlier this year, we saw the same vibe: companies with high ex-U.S. sales guided more cautiously when DXY pushed higher.

So, what do you actually do Monday morning? Nudge weights toward U.S.-centric revenue, hedge selective international sleeves where carry/fees net out in your favor, and keep an earnings-season FX checklist on your desk. Then, rebalance quarterly. Not exciting, but it works; I’d rather be boring and compounding than exciting and explaining. This actually reminds me of 2015 when everyone chased the dollar narrative, and the folks who just stuck to guardrails slept better. Anyway, size it, price it, tax-check it. Rinse, repeat, and don’t overthink the hero trade you won’t recieve a medal for.

Zooming out: compounding beats currency noise over the long run

Look, FX regimes cycle. They always have. The dollar surged into the 1985 Plaza Accord peak, ran again into 2001-02, climbed from 2014-16, and ripped to a cycle high around 114 on DXY in 2022 (ICE/FactSet). It’s still elevated this year, even if the weekly tape wiggles. But the thing that actually compounds your wealth isn’t the quarter-to-quarter currency squiggle; it’s earnings growth and the cash that gets sent back to you.

Put numbers on it. From 1926-2023, the S&P 500 delivered roughly ~10% annualized nominal returns (Ibbotson/CRSP-style history). The long-run building blocks have been: earnings growth in the mid-single digits, dividends around 3-4% in the early decades and closer to ~1.5-2% in the last decade, and whatever valuation change the market gives or takes. In the 2014-2024 window, S&P 500 cash yield, dividends plus net buybacks, has averaged roughly 3.5-5% per year (S&P Dow Jones Indices Buyback Quarterly; dividend yield ~1.6-2%, net buyback yield ~2-3%). That cash return doesn’t care if DXY is 90 or 110; it shows up, year after year, unless you sell too soon.

And yes, the dollar does bite at the margin. As noted earlier, a 10% USD move has historically hit S&P 500 EPS by ~3-4% on the way up (Goldman Sachs, 2015), with the pain concentrated in multinationals. S&P Global found that about 29% of S&P 500 sales came from abroad in 2022, so the channel is real. But the market’s long term math still comes back to earnings power and cash distribution. Honestly, I wasn’t sure about this either early in my career, then I watched three FX cycles come and go while the compounding just… kept going.

So what’s the playbook? Stay flexible, not binary. When FX trends look durable, it’s fine to tilt, U.S.-centric sectors, small/mid caps, services over heavy exporters, quality factors that can pass through costs. But avoid all-or-nothing timing. Anyway, I’ve seen more portfolios hurt by overreaction than by the dollar itself. You know the feeling: chasing a currency breakout on Wednesday, unwinding it by Friday, paying spreads and taxes, and for what?

Here’s the thing, sorry, I’m about to use jargon: focus on the total plan. By that I mean the boring stuff that wins: diversification, fees, taxes, and how often you rebalance. In plain English: own enough different cash flow engines so no single FX call dominates, keep costs low so more of the return is yours, mind after-tax returns (placement, harvesting), and rebalance on a set cadence so you’re trimming what ran and adding to what lagged without overthinking it.

Process beats prediction. If the dollar stays strong, your tilts help. If it fades, your diversification helps. Either way, compounding keeps working, unless you interrupt it.

• Dollar regimes cycle: position, don’t bet the farm.
• Long run drivers: earnings growth + buybacks/dividends are the bulk of S&P returns.
• Stay flexible: adjust sector/style tilts when trends look durable; avoid all-or-nothing calls.
• Total plan first: diversification, low costs, tax-aware placement, and a steady rebalancing cadence matter more than any single FX view.

Actually, let me rephrase that: compounding works occassionally in spite of us, not because of us. The goal is to stop getting in its way… and, you know, stop trying to be a currency hero every quarter.

Frequently Asked Questions

Q: How do I estimate what a stronger dollar could do to my S&P 500 exposure?

A: Look, keep it simple but disciplined. Step 1: anchor on foreign sales. FactSet said in 2023 roughly 40% of S&P 500 revenue is ex-U.S. Step 2: use a rule of thumb. In 2022, Goldman Sachs estimated a 10% USD appreciation shaved ~3% off aggregate S&P 500 EPS (all else equal). So a 5% USD pop? Call it ~1-1.5% EPS drag. Step 3: layer valuation. In a stronger-dollar, higher-real-yield backdrop (which we’re seeing in 2025), multiples can slip. If the index trades ~20-22x, a 0.5 turn change is ~2-3% on price. Step 4: scenario it. Mild case: 5% USD up → ~1% EPS hit plus maybe 1-2% multiple pressure. Tougher case: 10% USD up → ~3% EPS hit and 2-4% on multiples. Step 5: adjust your portfolio if needed. Practical tweaks: a) modest tilt to more domestic revenue (select small/mid caps, but watch their rate sensitivity), b) consider equal-weight S&P (RSP) to dial down mega-cap overseas concentration, c) prefer companies with natural hedges and pricing power (read the 10-K FX sensitivity table), d) if you’re sophisticated, an overlay with USD futures or a currency-hedged international ETF can offset FX without blowing up your core allocation.

Q: What’s the difference between translation and transaction FX hits in earnings?

A: Translation is accounting; transaction is cash. Translation: a European sale booked in euros gets converted into fewer dollars when the USD is strong, lowering reported revenue/earnings even if units sold didn’t change. Transaction: the business actually pays/recieves in foreign currency, think a U.S. company buying components in yen or selling a contract priced in euros. If they didn’t hedge, the FX move changes cash margins. Translation moves your reported numbers; transaction can move your actual economics. Both matter, but translation is what usually drags S&P 500 GAAP results when the dollar is firm.

Q: Is it better to tilt toward small caps, go equal-weight, or just stick with mega-cap S&P names when the dollar is strong?

A: Depends what risk you want to eat. Alternatives: 1) Small-cap tilt: pros, more domestic revenue, less direct FX drag; cons, higher debt costs and refinancing risk in a higher-for-longer 2025, and earnings cyclicality. If you do it, consider quality small caps (strong free cash flow, fixed-rate debt). 2) Equal-weight S&P (RSP): pros, reduces reliance on mega-cap multinationals with big overseas exposure; cons, adds more cyclical/financial exposure and usually higher volatility. 3) Sit tight in cap-weighted S&P (SPY/VOO): pros, keeps you in the dominant cash generators with pricing power; cons, more FX translation sensitivity and multiple pressure if real yields keep biting. My practical mix this year: keep the cap-weighted core, add a measured equal-weight sleeve (10-20%), and a selective quality small-cap slice if your time horizon is 3-5 years. Revisit if the dollar softens or if credit spreads widen, because then small caps can feel it first.

Q: Should I worry about the strong dollar hurting my S&P 500 returns in 2025?

A: I’d call it a headwind, not a thesis-killer. The USD has stayed firm this year on higher real yields and safe-haven flows, which can trim reported EPS (translation) and lean on multiples. Ballpark: a sustained 10% USD upswing historically lined up with ~3% EPS drag (Goldman, 2022). Actions I’d actually take: 1) Don’t over-concentrate in multinational mega-caps; 2) Stress-test your holdings, read FX sensitivity in filings, check revenue by region; 3) Prefer companies with pricing power and natural hedges; 4) If you own international stocks, consider a currency-hedged share class; 5) Rebalance, harvest gains from overweight winners that are most FX-exposed. And remember: historically, a strong dollar often coincides with the U.S. outperforming non-U.S. equities, so staying in the S&P 500 isn’t exactly reckless. Just, you know, manage the edges.

@article{does-dollar-strength-still-move-sp-500-returns,
    title   = {Does Dollar Strength Still Move S&P 500 Returns?},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/dollar-strength-sp500-returns/}
}