Morgan Stanley’s Chief Investment Officer Michael Wilson sees the dollar’s sharp decline as a compelling reason for equity investors to remain overweight U.S. stocks, particularly quality large caps.
As the greenback hits a three-year low amid tariff-related uncertainty and fading demand for safe-haven assets, Wilson suggests that U.S. equities could regain their edge versus international counterparts.
“From a global standpoint, we recommend favoring U.S. over international equities, as a weaker dollar should support relative earnings-per-share revisions for large-cap U.S. stocks—especially against Europe and Japan,” Wilson and his team noted in a recent strategy update.
The dollar’s retreat comes at a time when trade policy instability and concerns over surging federal debt levels have created a headwind for dollar demand. The U.S. Dollar Index recently hit its lowest level since 2022, reversing expectations for renewed strength this year.
While Wilson had previously cautioned that a strong dollar could weigh on equity performance, especially in the S&P 500, the actual market correction unfolded without dollar strength as a contributing factor.
Despite early-year headwinds—including tariff escalations and heightened volatility that briefly pushed the S&P 500 toward bear market territory—Morgan Stanley remains constructive on the path ahead for equities.
The firm expects U.S. equity markets to remain range-bound between 5,000 and 5,500 until key catalysts take shape, including progress on trade negotiations with China, interest rate cuts from the Federal Reserve, declining bond yields, and positive earnings revisions.
For RIAs and wealth managers positioning client portfolios, Wilson emphasizes the importance of staying invested in high-quality companies. “We remain in a late-cycle environment where quality and large-cap relative outperformance should persist,” he wrote. “While macro uncertainty remains elevated, we advocate for a barbell strategy: maintain defensive sector exposure while selectively adding to high-quality cyclicals that have already priced in a slowdown.”
Morgan Stanley continues to favor names with strong balance sheets and pricing power that can withstand earnings volatility. Among the firm’s current top recommendations: language learning platform Duolingo, global financial services firm Citigroup, digital advertising player Pinterest, and payments provider PayPal.
Wilson’s team notes that U.S. equities stand out not only because of currency dynamics but also due to their earnings stability and higher quality factor tilt compared to global peers. While concerns about U.S. asset underperformance have grown louder, particularly given rising fiscal risks and trade disruptions, Morgan Stanley believes the backdrop still favors a U.S.-centric equity allocation for long-term investors.
Wealth advisors may find this a timely signal to reassess geographic diversification strategies, especially in client portfolios with significant international equity exposure. The firm’s view is that despite a noisy macro backdrop, fundamentals for large-cap U.S. companies—especially in sectors such as tech, financials, and select consumer names—remain compelling relative to their global counterparts.
Importantly, the weakening dollar is expected to provide earnings tailwinds for multinationals based in the U.S., as foreign revenues translate more favorably back into dollars. This dynamic could strengthen the outlook for sectors with significant international exposure, including technology, healthcare, and industrials.
The current environment continues to warrant a disciplined approach. While Wilson acknowledges ongoing risks—including elevated inflation, the Fed’s timing on potential rate cuts, and unresolved trade tensions—his guidance reinforces the value of maintaining equity exposure in companies that exhibit operational efficiency, capital discipline, and earnings resilience.
For advisors managing client expectations amid persistent headlines about currency weakness, fiscal strain, and global uncertainty, Morgan Stanley’s message is clear: market leadership remains concentrated in U.S. quality large caps, and the recent decline in the dollar is not a red flag—but rather, a supportive development for equities.
In summary, Wilson advises that wealth managers:
Maintain a core allocation to high-quality U.S. large caps.
Overweight defensive sectors while opportunistically adding to high-quality cyclicals.
Monitor the dollar’s trajectory as a tailwind for earnings and equity valuations.
Stay cautious on international equity overweights, especially in Europe and Japan.
Prepare for a potentially range-bound S&P 500 until major macro catalysts materialize.
For RIAs and asset allocators navigating volatile global markets, Morgan Stanley’s dollar-driven equity thesis offers a concise framework for maintaining client confidence and portfolio discipline as the cycle matures.
