Morgan Stanley: "Dollar Weakness Could Improve Corporate Earnings and Revive U.S. Stock Market"

"Dollar Weakness → Improved Corporate Earnings → Global Capital Returning to U.S."

"Oversold Indicators, Performance Improvements Could Lead S&P 500 to Rebound to 5,500 Points"

Morgan Stanley argued that a weaker dollar could improve the earnings outlook for U.S. companies, favorably reversing the situation for U.S. stocks.

According to Bloomberg on the 24th (local time), Morgan Stanley expects that the weaker dollar will have a positive impact on U.S. corporate earnings, leading to a return of global capital to the U.S. They also stated that high-quality stocks could benefit from a market rebound.

Strategists including Michael Wilson at Morgan Stanley claimed that "a weaker dollar will bring global capital back to the U.S." As a result, they expect the U.S. stock market, which has underperformed compared to European and Chinese markets earlier this year, to rebound.

The Trump administration, focusing on reducing the trade deficit, is observed to likely induce dollar weakness through tariff pressures and interest rate cuts as in its first term.

According to a March survey by Bank of America, global investors have reduced their holdings of U.S. stocks by a record margin. Meanwhile, optimism about increased fiscal spending in Europe, including billions of dollars in defense and infrastructure spending, is driving investments into European stocks.

This shift is due to the gloomy outlook for U.S. corporate earnings. According to Citigroup data, downgrades in investment ratings by Wall Street analysts have outpaced upgrades this year.

Wilson from Morgan Stanley mentioned that there are signs of change even on Wall Street, which had downgraded U.S. corporate earnings outlooks earlier this year. He specifically noted that adjustments to the Magnificent Seven, which led last year's rally, may have already bottomed out. This could help in the return of funds to the U.S.

Wilson said, "One reason global investment capital turned to European and Chinese markets is that the high-quality leadership group in the U.S. stock market began to show poor performance." Therefore, if this group regains its relative strength, we could see funds returning to the U.S.

The S&P 500 fell more than 10% from its peak in February this year, entering a technical correction area earlier this month. It is still down 3.6% this year, while the Stoxx 600 index across Europe has risen more than 8%.

The Bloomberg-calculated Magnificent Seven index has fallen 14% this year due to concerns about excessive spending on AI development and doubts about valuations.

The gap between the multiples of the Magnificent Seven companies, which were generally valued at more than twice the PER of the S&P 500 since 2020, and the S&P 500 multiples has narrowed to the smallest difference since the second half of 2022. The average multiple of S&P 500 companies is 20 times, and the multiple of the Magnificent Seven companies has decreased to about 26 times.

The Morgan Stanley team saw the potential for the S&P 500 to rebound from the 5,500-point level reached earlier this month. Strategists stated that oversold momentum indicators, strong seasonal performance, and end-of-quarter flows would support the rebound. However, they noted that volatility is likely to persist.

Morgan Stanley strategists mentioned that "low-quality, high-beta stocks led the most recent rebound of the S&P 500 and this trend is expected to continue in the short term." However, they argued that holding high-quality stocks in the portfolio is advisable to benefit from the improved medium-term outlook for U.S. companies.

Guest Reporter Kim Jung-ah kja@hankyung.com