A weaker dollar could boost US stock earnings and reverse the global market rotation seen since early 2025, according to Morgan Stanley’s Michael Wilson.
The S&P 500 entered a correction this month, falling over 10% from February highs, though it has since rebounded slightly. Meanwhile, European stocks have outperformed, with the Stoxx 600 gaining over 8% this year. However, Wilson’s team believes US equities may soon regain strength as a weaker dollar drives capital back to the market. The dollar index has dropped 3.8% from its January peak.
Investor sentiment had shifted toward Europe due to concerns over US earnings, with downgrades outweighing upgrades. However, Wilson sees signs of stabilization, particularly in the “Magnificent Seven” tech stocks, which may have bottomed out. If these stocks recover, US markets could attract renewed interest.
The Magnificent 7 Index has declined 14% this year due to valuation concerns and AI investment sustainability. Yet, these stocks are now at their cheapest levels in two years relative to the broader market.
Wilson’s team anticipates a “tradeable rally” in the S&P 500 around 5,500, aided by oversold conditions, seasonal strength, and quarter-end flows, though volatility is expected. While recent rebounds have been led by high-beta stocks, Morgan Stanley still favors high-quality shares for long-term portfolios.