A steep plunge in the dollar is a reason to stay bullish on stocks, Morgan Stanley's CIO says
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- The dollar's sharp decline could help US stocks outperform, analyst Michael Wilson wrote.
- The greenback hit a three-year low amid tariff jitters this month.
- Investors should stay invested in quality US large caps, Wilson said.
As Wall Street voices fears over the potential for US assets to lose their edge against international peers, Morgan Stanley says a waning dollar could be the stock market's saving grace.
The bank expects the greenback's recent decline to buoy US stocks against international equities, preserving "US exceptionalism."
"From a global standpoint, we recommend favoring US over international equities as a weaker dollar should benefit large cap US relative EPS revisions (particularly versus Europe and Japan)," according to analysts led by chief investment officer Michael Wilson.
US indexes will also stand out due to less volatile earnings growth and higher quality bias.
This month, the US Dollar Index hit a three-year low, as trade policy whiplash coincided with a sharp sell-off in US safe-haven trades. Tariff escalations and high levels of government debt have caused dollar demand to crash, despite early-year expectations for a stronger currency in 2025.
Wilson was among those projecting greenback strength, initially warning late last year that a strong dollar could upend the S&P 500 rally.
But the index went on to tumble early this year without the dollar's help, plunging toward bear market territory as tariffs ratcheted up uncertainty and volatility. The analysts now expect the S&P 500 to remain trading between 5,000 and 5,500 until specific developments pass. That includes a US tariff deal with China, interest rate cuts, lower bond yields, and a rebound in earnings revisions.
For investors considering portfolio changes, the biggest takeaway is to stick to quality stocks.
"We remain in a late cycle backdrop where both quality and large cap relative outperformance should continue," Wilson wrote.
"While uncertainty persists and defensives should remain overweight in one's portfolio, we do think it makes sense to pick spots in high quality cyclicals that have already discounted a material slowdown in both macro conditions and earnings."
Among the top names highlighted by Morgan Stanley are Duolingo, Citigroup, Pinterest, and PayPal.