Dollar Could Drop Another 10%, Says Morgan Stanley's Wilson

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00:00Morgan Stanley is out, as we have been talking about, with its mid-year report and outlook.

00:04Strategists reiterated their 6,500 12-month target for the S&P 500, suggesting a better

00:10second half of 2025 for markets after the huge shock from Trump's trade strategy.

00:16Let's bring back Morgan Stanley's chief U.S. equity strategist and CIO, Mike Wilson.

00:20Mike, one of the drivers, I guess, on the upside could be a weaker dollar, right?

00:26We've seen the dollar just plummet year to date.

00:30I'm looking at the Bloomberg dollar index.

00:31It comes from 1320 down to 1220, so down 100 points.

00:35Does that fuel, you think, better revenues for U.S. companies?

00:39It's definitely part of the storyline.

00:40I mean, it's one of the reasons we made this call about six weeks ago when the dollar was weaker.

00:43We said, you know, U.S. versus the rest of the world is about to turn up because it affects

00:47revision breadth, which is the number one driver of stocks.

00:50And we see that now in the data very clearly.

00:52It really started with Microsoft when they reported earnings.

00:55You know, they had a big upside beat, and that was driven a lot.

00:59That was driven by currency, and that drove revisions.

01:01And so, you know, think about S&P 500.

01:03It's multinational companies.

01:05They get about 30%, 35% of revenues from overseas, and they know how to manage the currency situation.

01:09You always hear about currency when it's a headwind.

01:11They never talk about it when it's a tailwind.

01:13But that has driven the revision breadth, and that's what models are picking up now.

01:17And if we just stay around these levels, that tailwind will persist into the second half.

01:20Our forecast for the dollar, by the way, in this mid-year update is for another 10% decline.

01:26So you think about it.

01:26In the dollar?

01:27In the dollar.

01:27So if that continues into next year, okay, that's just going to provide another tailwind

01:32for 2026.

01:33It's just another reason why the S&P has a really hard time, you know, correcting more than 10%.

01:38Isn't that rough for inflation?

01:39I mean, if we're already paying a tariff on all the stuff we buy from overseas, and a lot of the stuff

01:44we buy is from overseas, the dollar gets another 10% weaker, it just seems like that drives inflation

01:50higher and locks the Fed in place.

01:52It definitely could.

01:53And I mean, the one to watch on that is commodities.

01:55And so I am encouraged by the fact that oil has been soft.

01:59Good point.

01:59Due to some of the things.

02:00Jamie Dimon called that out as well.

02:01100%.

02:02So, you know, commodities are the big thing to watch in that regard.

02:06But remember this, Matt.

02:07You know, stocks do well when inflation is accelerating.

02:10It's a little-known fact, okay, because it drives earnings.

02:13In 2020 and 2021 is when inflation really took off.

02:17Those are the two best years for the average stock.

02:19So just don't underestimate kind of like inflation can be bad for the consumer at the margin as

02:25long as it doesn't turn into a recession.

02:26But I guess my question about the dollar is why would it drop another 10%?

02:31Now, I remember a conversation we had with Jane Fraser about a month ago, or really just

02:35a couple weeks ago back at Milken, this idea that the selling of U.S. assets has been a

02:40big problem here.

02:41Why wouldn't the same be true for stocks if you believe the dollar is going to fall?

02:44Well, it's why it's falling, to your point.

02:46So if our call on 175 basis points of rate cuts next year proves to be true, you'll get

02:50a 10% decline.

02:51If it's only 100 basis points of cuts, it'll be less.

02:54But the direction of travel is south for the dollar, particularly against the yen, which

02:58they're not going to be cutting rates anytime soon.

03:00Or against some of the, even the European currencies, or the currency, but also the pound, because

03:05they can't, they don't have as much room to cut in a slowdown.

03:09Does Milken feel like years ago by now?

03:11It feels like years ago.

03:13You know what also feels like years ago?

03:14The last time we saw NVIDIA up on the year, right?

03:17I mean, I'm sorry.

03:18It's crazy.

03:19I'm looking at the Magnificent 7, and I do this every morning with Matt.

03:22I keep it on screen.

03:24I like it.

03:25I like it.

03:26I'm waiting for NVIDIA to turn positive on the year.

03:28It had for a minute, but that minute feels like a year ago.

03:31You use BM 7P.

03:33I like BM 7T, but go on.

03:35The total return.

03:35Fine, fine.

03:35Yes.

03:36I could agree with that.

03:37But you don't have a lot of the Mag 7 up on the year.

03:40In fact, you have pretty significant declines.

03:42And I'm wondering from your perspective, you were talking about Microsoft getting that gain

03:45from the dollar back.

03:46But what about everything else?

03:47I mean, at what point does the Mag 7 bring back the market, or are you counting on something

03:52else entirely?

03:53Well, the Mag 7 is outperforming again.

03:56Even Tesla, I mean, is down a lot on the year, but it's had a really good run here for

03:59the last month, month and a half.

04:01And I think this all just comes back to the idea.

04:03If you're more uncertain about the future, generally speaking, what do you really want

04:07to own?

04:07Do you really want to own all these international things and things at higher volatility of earnings,

04:12or do you want to own the S&P 500, which has the lowest volatility of earnings?

04:16You now have a dollar tailwind, and you have an administration that's pushing on the gas

04:20pedal now, as opposed to the brake pedal, and a Fed that's about to flip.

04:23I mean, that seems like a pretty constructive story over the next six months, notwithstanding

04:27that we have maybe some near-term risks here, because we rallied too much in the short-term,

04:32and now we have a rate issue in the short-term.

04:35I don't think that's going to be a persistent issue.

04:36It's a short-term issue.

04:37It's convincing.

04:38You're convincing.

04:39I feel like I could just spend 10 minutes with you, Mike, and then we don't have to

04:42do the rest of the show.

04:43Great.

04:43Let's do 10 more.

04:45Mike Wilson there from Morgan Stanley.

04:48Great having you on the set.

04:49Thanks so much for joining us.

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