Morgan Stanley’s Wilson Predicts a Turn in Favor of US Stocks Amid Weaker Dollar

Introduction

The US stock market has faced significant headwinds in early 2025, with the S&P 500 (^GSPC) slipping into a technical correction after declining more than 10% from its February highs. However, Morgan Stanley’s Chief Investment Officer, Michael Wilson, suggests that the tide may soon turn in favor of US equities. A weakening US dollar, improving earnings outlook, and potential rebounds in high-quality tech stocks could drive capital back to US markets.

In this blog post, we’ll explore:

• The recent underperformance of US stocks vs. international markets
• How a weaker dollar could boost US corporate earnings
• The potential resurgence of the "Magnificent Seven" tech stocks
• Morgan Stanley’s outlook for a near-term rally in the S&P 500

US Stocks vs. Global Markets: A Shift in Sentiment

Recent Underperformance of US Equities

• Year-to-date (as of March 2025), the S&P 500 is down 3.6%, while the pan-European Stoxx 600 has surged over 8%. This divergence reflects a massive rotation away from US stocks as investors seek opportunities in Europe and other international markets.
• Fiscal expansion in Europe, particularly in defense and infrastructure spending
• Earnings downgrades for US companies, with Citigroup’s earnings revision index showing more downgrades than upgrades
• Valuation concerns for US tech giants, which drove much of 2024’s rally

Investor Sentiment Shifts Away from the US

A Bank of America survey in March revealed that investors have reduced US stock holdings at a record pace, while increasing exposure to European equities. This trend was fueled by expectations of stronger earnings growth outside the US.

How a Weaker Dollar Could Boost US Stocks

The Dollar’s Decline and Its Impact on Earnings

The Bloomberg Dollar Spot Index has fallen 3.8% from its January peak, signaling a potential shift in currency dynamics. A weaker dollar typically benefits US multinational companies by:

• Boosting overseas revenue when converted back to USD
• Making exports more competitive in global markets
• Improving earnings revisions, which could attract investors back to US equities

Historical Precedents

• Stronger earnings for S&P 500 companies (particularly those with high international exposure)
• Increased foreign investment in US equities
• Outperformance of US stocks vs. global peers

The Magnificent Seven: Could a Rebound Be Coming?

Tech Stocks Have Lagged in 2025

The Bloomberg Magnificent 7 Index (which includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) has fallen 14% year-to-date, weighed down by:

• AI spending concerns (high capital expenditures impacting profitability)
• Stretched valuations after 2024’s rally
• Regulatory and macroeconomic pressures

Valuations Now More Attractive

• The group is trading at its cheapest level relative to the broader market in over two years
• Earnings revisions for these stocks may have bottomed near 0%, signaling stabilization
• A rebound in tech could reignite investor interest in US equities

Morgan Stanley’s Outlook: A Near-Term Rally for the S&P 500?

Potential Support at 5,500

Wilson’s team sees a “tradeable rally” possible if the S&P 500 holds near 5,500, a key support level tested earlier in March. Factors that could drive this rebound include:

• Oversold conditions (momentum indicators suggest stocks are due for a bounce)
• Seasonal trends (historically, late Q1 and early Q2 see stronger equity performance)
• Quarter-end rebalancing (institutional flows may support US stocks)

High-Quality Stocks Favored for Long-Term Gains

While lower-quality, high-beta stocks have led recent rebounds, Morgan Stanley still recommends high-quality names for long-term portfolios. Key sectors to watch include:

• Technology (if earnings stabilize)
• Healthcare (defensive appeal)
• Industrials (benefiting from infrastructure spending)

Conclusion: Is the US Stock Market Set for a Comeback?

Morgan Stanley’s Michael Wilson believes that US stocks may soon regain favor as:
✅ A weaker dollar improves earnings outlook
✅ The Magnificent Seven stabilize and attract investor flows
✅ The S&P 500 finds support near 5,500, setting up a potential rally

While volatility may persist, the intermediate-term outlook for US equities appears brighter. Investors should watch for:

• Dollar trends (continued weakness could signal stronger earnings)

• Earnings revisions (upgrades may indicate improving sentiment)

• Tech stock performance (a rebound could drive broader market gains)