While not quite almighty, the U.S. dollar is enjoying an unexpected rebound in 2021, and that’s starting to make some stock-market bulls nervous.
“Generally, a stronger dollar is a negative for the S&P 500 when we look at the performance of that index in isolation (see chart below), even though a stronger dollar is a positive for the S&P 500 when we look at its performance relative to emerging markets and non-U.S. developed markets,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a note earlier this week.
Calvasina said that when it comes to most of the U.S.-equity-focused investors she and her team speak with, “a stronger dollar should be viewed as a negative development, as it tends to coincide with downward EPS (earnings per share) estimate revisions for both the S&P 500 and Russell 2000 both at the broader index level as well as most of its sectors.”
In particular, a look back at the dollar’s relationship to stock-market sectors over the years rings an alarm bell over the durability of the popular reflation trade, which expects cyclically sensitive stocks to lead the broader market higher as the economy more broadly reopens in the wake of the COVID-19 pandemic.
