Morgan Stanley says the market rebound will likely suffer from the dollar
Don’t expect the recent market rebound to continue, according to Morgan Stanley. The S&P 500 has jumped more than 5% since falling into a bear market in June. However, the benchmark is down more than 18% for 2022 and about 20% below the record high set in January. However, Michael Wilson, chief investment officer at Morgan Stanley, believes that these gains may be short-lived thanks to the historically strong US dollar. The Dollar Index, which tracks the performance of the US currency against six other major currencies, is up more than 17% year-over-year and 12.6% for 2022. “This dollar strength is just another reason to believe that earnings revisions are declining over the next few earnings seasons, Wilson wrote in a note. Issued Sunday. “So, the recent rally in stocks is likely to fizzle out before too long.” S&P 500 companies including PepsiCo, Delta Air Lines and JPMorgan Chase are due to report results this week, kicking off their quarter earnings season. II.Many companies in the S&P 500 have a significant portion of their revenue coming from abroad, which means that a strong dollar could hurt their bottom line profits.Last week, Piper Sandler lowered his estimates for Microsoft, citing the dollar’s recent strength.Goldman Sachs recently Compiling a basket of the most exposed US stocks, saying that the domestically oriented stocks outperformed.” The simple calculation of the S&P 500’s currency earnings is that for every percentage point increase in the dollar year-over-year, that equates to roughly 0.5 times EPS growth. At a level…today, that translates to 8% headwinds to EPS growth for the S&P 500, all else being equal,” Wilson said. The dollar’s outperformance — which Wilson said is “as extreme as it has been historically” — comes as The Federal Reserve has moved to tighten monetary policy in its efforts to stave off rising inflation. The central bank is not expected to back down from its hawkish path either, which could put further upward pressure on the dollar—and thus hurt stocks in the process. According to Wilson: “In Ultimately, the Fed wants a meaningful economic slowdown to curb inflation, and a strong dollar is part of the mix.” — CNBC’s Michael Bloom contributed to this report.