Morgan Stanley Says Stock Rally to Wane as Dollar Soars

(Bloomberg) — One of Wall Street’s most vocal bears is growling again, this time because of dollar strength.

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The “extreme” rally in the greenback over the past year typically comes alongside market stress or recession, or both, Michael J. Wilson, chief US equity strategist at Morgan Stanley, wrote in a report Sunday, noting how the Fed will want a meaningful economic slowdown and “a stronger dollar is part of that mix.”

As such, the surge will be a “massive headwind” for profits at many large US firms and another reason to expect a dimming earnings outlook, he wrote, adding “the recent rally in stocks is likely to fizzle out.”

The Bloomberg Dollar Spot Index jumped on Monday, taking the gauge back toward levels last seen more than two years ago during the market panic caused by the onset of the pandemic. A combination of steep Federal Reserve interest-rate hikes and economic growth fears have lifted the greenback.

Looking at the 16% climb in the ICE U.S. Dollar Index over the past 12 months, Wilson said that signals an 8% headwind for S&P 500 earnings per share growth. The dollar is set to remain firm as money-supply expansion wanes amid tighter Fed policy, he said.

The dollar “is unlikely to show any signs of demise until the Fed pivots, which seems unlikely” for now following Friday’s strong jobs report, Wilson said.

The S&P 500 is up about 6% since a mid-June low, paring its 2022 drop to 18%. Opinion is split on whether the respite is any more than a bear-market bounce, and the looming earnings season is set to shed light on recession fears. S&P 500 futures fell 0.6% as of 1:37 p.m. in Tokyo in a gloomy start to the week.