NEW YORK (CNN/Money) -
Sure, U.S. companies' earnings are up big from a year ago. But look at how much of the improvement is due to the weaker dollar and suddenly things don't seem so positive.
Take 3M. On Monday, the Minnesota-based industrial outfit reported second-quarter earnings of $1.56 a share, up from $1.36 a year ago and 4 cents better than estimates. An all-in-all swell quarter -- as one could readily discern from the 4.8 percent jump 3M (MMM: Research, Estimates) shares took on a down day for the stock market in general.
In its earnings release, however, 3M made it quite clear that much of its growth was due to the flagging greenback. Sales worldwide, it said, increased 10.1 percent from a year ago to $4.58 billion. But nearly half of the sales boost -- 4.6 percent -- was due to currency effects, the company said. Without that gain, earnings would have come to just $1.44 a share -- still up from a year ago, but no great shakes.
And so it's gone through much of the earnings season, with a bevy of big companies getting currency-related earnings. On a trade-weighted basis, the dollar declined by 8.7 percent from the end of the second quarter of last year to the end of the second quarter this year. Against the euro the drop was an especially stark 14 percent. Lousy news if you're taking one of those nine-countries-in-seven-days vacations to Europe this summer, great if you're in the business of selling widgets to Frenchmen.
"I would estimate that in the first half of this year as much as 40 percent of the increase in the total profits of companies came from the weakness in the dollar," said Credit Suisse Asset Management managing director Stanley Nabi.
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 | | Quarter* | | Earnings growth | | First | 11.7% | | Second | 6.9% | | Third | 13.5% | | Fourth | 21.3% |
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| * First quarter actual; all others estimated. | | Source: First Call |
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Given that the dollar appears to have stabilized, said Nabi, the currency boost should abate over the quarters to come, making it difficult for companies to maintain the sort of earnings growth they're seeing now.
So, since the effect of the drop in the buck will eventually abate, should we pretend it didn't happen? Hardly, thinks Banc of America Securities equity portfolio strategist Tom McManus.
He points out first that with the dollar's reversal companies are merely getting back what they lost during the many years of dollar strength. The greenback had a big run from 1995 to early 2002, yet we didn't adjust earnings upward during those years to make up for currency losses. Why should we adjust them down to account for currency gains now?
Second, even if the dollar weakens no further, U.S. companies will continue to benefit. The drop in the greenback has made them much more competitive abroad and some may choose to use it to drop prices, and so grab market share.
"You can use the dollar to create more revenue," he said. "That's a very powerful thing."
But maybe the biggest reason to not whine too much about how much of a boost earnings are getting from the languid-looking buck is that it all counts in the box score.
"Almost every quarter I can remember people have come up with reasons to explain away earnings gains," said First Albany chief investment strategist Hugh Johnson. "The truth is that earnings are doing better, and the hope is that, because earnings are improving, companies will begin to hire and spend money on technology."
In other words, the main issue for investors is still whether the economy really is on the way to recovery, because that, more than everything else, is what is going to determine whether earnings can keep on growing.
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