The dollar just wrapped up its worst half of a year since 1973, but the US currency’s loss might be the stock market’s gain.
Morgan Stanley predicts that the dollar will continue depreciating throughout the year but it views this trend as a “substantial, under-appreciated tailwind” for stocks, one that could drive fresh earnings growth.
It also laid out four sectors of the stock market the are set to benefit most from the dollar’s string of declines.
“The dollar is currently down approximately 11% from the January highs and is expected to fall another 7% by mid-2026 providing a substantial boost for multinational earnings,” analyst Michelle Weaver said in a recent note.
In Morgan Stanley’s thesis, the key tailwind for stocks is companies with high exposure to foreign sales. A weaker US dollar makes currency conversions more favorable for overseas customers and makes US goods more attractive.
Weaver also highlighted the translation effect, in which such companies can “earn a premium when exchanging revenues earned in foreign currencies into USD,” which does not apply to competitors who only sell in the US.
This creates an environment in which larger cap stocks are well-positioned to benefit. The note adds that the S&P 500, composed of the largest publicly traded US companies, typically derives roughly 40% its revenue from abroad. By contrast, the small-cap Russell 2000 sees about 22% of its revenue from overseas sales.
“We have a broad preference for large-cap stocks given their higher-quality balance sheets, stronger pricing power, and stronger supplier negotiation power — the dollar dynamic further supports this view,” she noted.
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For investors looking for specific sectors to focus on, Morgan Stanley has highlighted those with the highest foreign revenue exposure.
First on the list is tech, which boasts more than 50%. The materials sector is next, with just over 40% exposure, followed by industrials, with 30%.
Tech makes up the largest portion of the S&P 500, accounting for more than 30% of the benchmark index. That’s likely part of why Morgan Stanley predicts it will rise even more as the dollar declines.
As the bank said in a separate report this week, upward earnings revisions are the stock market’s secret weapon for hitting new highs.
“Morgan Stanley expects the S&P 500 to end the year at 6,500, implying a gain of about 5% from current record levels. With analysts growing more bullish on corporate earnings, the outlook points to a potentially sustainable growth trajectory.”
The “Big Beautiful Bill” that’s moving through Congress is also expected to increase the national deficit by as much as $3.3 trillion, which could push the US dollar down even further.
