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Citi’s currency strategists have reiterated their view that the U.S. dollar strength is here to stay. They believe the continued greenback strength should favor U.S. Large Cap stocks given their “relative safe haven” status.
“US Large Cap is a likely relative winner in the global equity landscape if dollar appreciation persists, despite EPS headwinds. A stronger dollar delineating even more severe growth concerns likely drives investors in a relative sense to the US. Large likely leads Small Cap given the latter’s risk-on connotation,” they told clients in a note.
Still, the dollar strength will continue to hurt earnings with Citi calculating that the “+11% rise in the trade-weighted dollar in the past year could hit early 2023 index level earnings by -$15-20.”
“This is well recognized in our 2023 S&P 500 EPS estimate of $215, but not in bottom-up consensus of $239,” the analysts added.
“To us, dollar direction provides more of a signal to equities on the condition of global growth.”
Interestingly, they add that if the dollar is to reverse direction from here, it will not help the S&P 500 as much as the strength has hurt the U.S. benchmark index.
“Dollar versus equities correlations are typically negative unless the US is viewed as the epicenter of a global growth scare (i.e. the onset of the Financial Crisis).”
In case the dollar upside signals lesser macro confidence, the analysts see the case for Growth to outperform Value.
