S&P 500 And A Weakening Dollar

U.S Dollar Weakness

Since Liberation Day, the S&P 500 has rallied and is now trading above its pre-Liberation Day levels. The U.S. Dollar, however, has weakened significantly in the same period.   

At the start of the year, foreign investment was flowing into the dollar and U.S. assets.

The U.S. had sound growth, inflation was on a downward trend, and interest rates were relatively supportive.

In the last decade, U.S. stocks have benefitted from $18 trillion of foreign investment, which represents 18% of the stock market.

It seems that since the inauguration, the Trump administration has been determined to dismantle the factors that contributed to U.S. exceptionalism.

The dollar, specifically, was singled out for attention. Trump has always favoured a weak dollar.

The U.S. dollar index has further to fall and is likely to decline to 96 before any meaningful correction.

On balance, a weak dollar is good for markets.

Multinationals and industrials benefit from a weaker dollar. Commodities, and particularly industrial metals, benefit from a weak dollar.

The Mag 7 tech stocks are insulated from the inflationary forces of a weak dollar.

If the dollar continues to weaken, at what point does it become a problem?

Foreign Investment In The S&P 500 

There are several headwinds, including capital controls in the “Big Beautiful (tax) Bill” that would reduce the flow of investment into the U.S.

In the last couple of months, the stock market has seen foreign investor outflows of $60 billion.

As noted in an earlier post, nearly all foreign flows into U.S. equities are unhedged, meaning they are not protected against currency fluctuations. Consequently, currencies have an outsized impact on realised returns.

Investors in Europe or Japan are less concerned about the return in dollars and more sensitive to the realised return in their local currency.  

That could lead to foreign investors re-evaluating their U.S. asset exposure.

The impact of tariffs remains an unknown factor, which has led the Federal Reserve to maintain its current stance of holding rates steady.

The S&P 500 has not yet returned to its all-time highs, which may be an early indication of U.S. underperformance compared to global equity indexes.  

A weak dollar and strong bond yields, which are pricing in slower growth, are not favourable for equities.

That said, Trump knows that he has lost the trade and capital war that he started. The resultant shift in focus from Main Street to Wall Street and a K-shaped economy will be favourable for stocks.

S&P 500 Key Levels

The S&P 500 opens in positive gamma today. The gamma flip zone sits at 5880; the call resistance level has moved up to 6043, and the put support has moved up to 5755.

Markets are digesting the impact of the hostilities between Iran and Israel, and a retest of the gamma flip zone can’t be ruled out.