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By Bloomberg

The dollar’s ascent to highs not seen since the invasion of Iraq sent a shock wave through American stocks, erasing gains for the year on concern earnings are in worse shape than investors recognized.

Dragged down by technology companies and banks, the Standard & Poor’s 500 Index slid 1.7 percent to 2,044.16, extending the loss from last week’s record to 3.5 percent. Shares slid as the dollar posted its ninth gain in 10 days against the euro, a climb that threatens U.S. profits and dramatizes a bigger anxiety for traders, the Federal Reserve.

“It’s hard to stop the trend,” said Bill Schultz, who oversees $1.2 billion as chief investment officer at McQueen, Ball & Associates in Bethlehem, Pennsylvania. “We’re stuck with a stronger dollar until we hear something more out of the Fed about modifying the trend toward higher rates, which isn’t likely.”

While selling U.S. equities has been a money-losing decision for six years, investors are doing it again amid concern wage growth will force the Fed’s hand on rates. They’ve yanked $7.1 billion from mutual and exchange-traded funds tracking American shares and sent $35 billion to other markets this quarter, data compiled by Bloomberg and Investment Company Institute show.

U.S. Stocks

The S&P 500 is down 0.7 percent in 2015, trailing all other 23 developed markets except for Greece. Tuesday’s drop was mirrored in Europe, where the Stoxx 600 Index lost 0.9 percent. U.S. 10-year Treasury yields fell to 2.13 percent while German bund yields sank to 0.23 percent, as European Central Bank bond- buying extended the yield premium. The MSCI Emerging Markets Index, denominated in dollars, fell for an eighth straight day.

S&P 500 futures expiring this month rose 0.3 percent at 7:57 a.m. in New York, and the Stoxx Europe 600 Index added 1.1 percent.

Currency markets created the pressure Tuesday, with the dollar surging to an almost 12-year high versus the euro and the highest in 7 1/2 years against the yen. The euro has fallen versus the greenback for eight straight months as the Fed wound down its quantitative easing program and signaled a rate hike just as the ECB prepared to start stimulus.

A 10 percent strengthening in the trade-weighted dollar lowers the estimated 2015 profit for the S&P 500 by about $3 a share, according to an earnings model created by Goldman Sachs Group Inc. The benchmark equity gauge will have earnings per share of $123.52 this year, according to the average of 20 strategist forecasts compiled by Bloomberg.

European Exposure

A Goldman Sachs basket of the 50 companies in the Russell 1000 Index with the highest sales exposure to Europe -- primarily Western and Northern European countries -- fell 1.8 percent on Tuesday. United Technologies Corp., which received 19 percent of its 2014 sales from Europe, slid 3.6 percent, the most since November 2011. General Electric Co. got 17 percent of its revenue last year from Europe and fell 1.8 percent.

“An uptick in economic activity should bode well for the earnings profiles of European companies,” Mark Luschini, chief investment strategist in Philadelphia at Janney Capital Management LLC, which oversees about $68 billion, said in a phone interview. That could spur European investors to “fish in their own ponds as opposed to stretching for returns elsewhere,” he said.

After expanding at an annualized rate of 15 percent since 2009, corporate profits are forecast to decline in the first and second quarters of this year, analyst estimates compiled by Bloomberg show. At the end of 2014, analysts projected growth of at least 3.3 percent for each of the two quarters.

Profit Outlook

Should S&P 500 earnings fall for the first three months of 2015, it would mark the first period of negative earnings since 2009. The closest profits have come to contracting since then was the second quarter of 2012, according to Bloomberg data. That period also featured a strong dollar, with the currency climbing in May 2012 to its strongest level in two years versus its European peer.

“Stock investors are concerned that the best of earnings are behind us,” Jeff Sica, president and CEO of advisory firm Circle Squared Alternative Investments, which oversees $1.5 billion, said in a phone interview. “Growth has been relatively slow and in those conditions you can’t expect much.”

However much a rising dollar might squeeze earnings in isolation, such moves don’t happen in a vacuum and a currency usually strengthens at the same time as an economy, according to Jonathan Golub of RBC Capital Markets.

Economic Growth

Gross domestic product in the U.S. will grow 3.1 percent this year, according to economist estimates compiled by Bloomberg. That would be the biggest increase of the bull market. The economic measure has seen growth of 2.5 percent or below since the start of 2010.

“There’s no question that a stronger dollar is bad for earnings but it’s not bad for multiples,” Golub, chief market strategist at RBC Capital Markets, said in a phone interview. “The biggest reason for the move in the dollar right now is changes in interest rates and rates are going up because we’re stronger and healthier. A lot of it does tie back to economic success.”

After last week’s U.S. employment report showed the labor market is sustaining progress after the best annual performance in five years, investors are increasingly convinced the Fed will raise interest rates by mid-year, according to Deutsche Bank AG chief U.S. equity strategist David Bianco.

That could result in a decline of up to 9 percent in the benchmark gauge, said Bianco. He also expressed concern over how profit growth will be negatively affected by the dollar’s strength versus the euro.

Earnings Forecasts

Earnings growth for companies in the S&P 500 will contract 5.1 percent for the first quarter of 2015, according to analyst estimates compiled by Bloomberg. As recently as Jan. 23, the forecast for profit growth was positive. Revenue is estimated to decline 3 percent for the period.

“The overall worry in the market has to do with whether we’re going to see earnings growth,” John Carey, a Boston-based fund manager at Pioneer Investment Management, which oversees about $230 billion, said in a phone interview. “As long as earnings growth is thought to be stagnating this year, people may be thinking it’s time to pull in their horns.”