There is a new headwind blowing against S&P 500 earnings… on top of the stubborn inflationary cost pressures and supply chain snags that continue to weigh heavily on bottom lines.

I’m talking about the unstoppable U.S. dollar, which has rallied sharply against other major currencies in recent months. Buoyed by aggressive Fed rate tightening and loftier rates on dollar-denominated securities, investors have been piling into the greenback. The U.S. Dollar Index has appreciated 18% against a broad basket of currencies over the past year.

That is an epic move in the normally placid currency markets.

This surge is great for the buying power of U.S. travelers abroad. But for multinational companies who derive a good chunk of their profits overseas, not so much. Not only does it make U.S. manufactured goods less competitive in foreign markets, but it also means that all those Euros and Francs and Yuan earned around the globe will convert back into fewer dollars.

The dollar has soared 30% against the Japanese yen, for instance. A year ago, it took 114 yen to equal one greenback. Now, the conversion rate is 150:1. We haven’t seen this level in more than thirty years. The dollar set a historic new peak against the British pound last month. Same story in Australia, Canada, and elsewhere.

Approximately 30% to 40% of sales among S&P 500 members come from beyond U.S. borders. The tech sector is the most vulnerable; utilities have the least exposure. Overall, Citi estimates that a 10% uptick in the dollar could erase $15 to $20 in aggregate S&P earnings next quarter. And we’ve seen a much steeper move than that, which could effectively neutralize double-digit growth in local currencies.

So get ready for a slew of dollar-related earnings misses – it’s a ready-made (if justifiable) excuse. Case in point, Nike (NYSE: NKE) shares just slid to a multi-year low after the company warned that currency translation could shave $4 billion from sales this year. Last quarter’s soft 4% reported revenue growth was 10% before the dollar’s impact.

The Global Oil Trade Is Still A Major Factor

But foreign exchange isn’t the only global market impacting the economy and investors. If that weren’t enough, the volatile energy market continues to make investors nauseous.

Benchmark West Texas Intermediate (WTI) crude started the year in the upper-$70s, then soared to $115 in February (just about the time Russia invaded Ukraine). It peaked in June at $120 and then descended downhill, completing the round-trip back into the upper-$70s.

But prices are again on the upswing, flirting with the $90 per barrel level. To get an idea of the wild ride, take a look at the chart below.

You can blame Saudi Arabia and OPEC. The cartel’s ministers recently voted to curb daily output by two million barrels behind closed doors in Vienna. Global oil consumption stands at approximately 100 million barrels per day, so this decision represents about 2% of worldwide demand. That’s the steepest production cut since Covid struck.

As I’ve written previously, Saudi Arabia and its cohorts are engaged in a faceoff with the Biden administration.

On one side, OPEC wants to slash oil supplies to counter sluggish demand and help firm prices in the face of economic uncertainty. (Ongoing Covid restrictions have sapped consumption in China, and a global recession could further dampen usage, perhaps leading to another inventory glut.) Geopolitics is a factor as well.

On the other side, the Biden administration has been releasing stock from the Strategic Petroleum Reserve in an effort to provide relief at the pump (and also ahead of the November elections.) The White House maintains that it is unlikely OPEC will make good on its commitment, as members have already struggled to meet production targets. The administration recently announced the final installment in a planned sale of 180 million barrels from the reserve and also signaled that more could be on the way in 2023.

What This Means For Investors

I doubt many of you reading this are intrigued by the swings in the global currency market. But make no mistake, this will likely impact a lot of major corporations at a pivotal time (earnings season).

Consider small-cap stocks if you’re looking for picks immune to the turmoil. Many small caps have little to no presence overseas and aren’t feeling the same pinch as their larger brethren.

Meanwhile, as east and west face off on the geopolitical front, this production cut is an unwelcome development for drivers and could impact next month’s elections.

But there’s no mistake that the reversal in oil prices is a welcome development for producers. And energy stocks (the only S&P sector in positive territory this year) are responding in kind. The iShares Oil & Gas ETF (NYSE: IEO) has rallied nearly 12% since the beginning of October.

But if you’re looking to pick favorites, consider ConocoPhillips (NYSE: COP).

With assets and projects from Alaska’s famed Prudhoe Bay to the Ekofisk region of Norway, COP has ramped its average daily production to 1.7 million barrels. Multiply that by the average realized sales price of $88 per barrel (an increase of almost 80% over the past year), and you can understand the bottom line surge.

The shareholder-friendly company has authorized a sharp $5 billion increase in this year’s return of capital plan (from $10 billion to $15 billion). The regular quarterly dividend of $0.48 only eats up a fraction of that, so it is being supplemented with quarterly variable returns of cash (VROC) tied to profits. The next installment will be payable at $1.40 per share.

Over at High-Yield Investing, we’re sitting on a 354% gain since adding COP to our portfolio in March of 2020. But with OPEC taking more supply offline, I see even more gains ahead.

As much as I still like COP, my team and I have just uncovered what we think is the Mother of All Oil Booms, and the number one stock that’s set to profit from it…

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