Image Source: Pexels

A recent survey of institutional investors conducted by Goldman Sachs Global Banking & Markets showed a growing confidence in stocks heading into the back half of the year, led by the Magnificent 7.

Yet, this confidence runs counter to views on the dollar, which they see as weakening. A weakening dollar can be a sign of a slowing economy, and that, in turn, could lead to a downturn in stock market growth.

But these are unusual circumstances, and the machinations are complex, as researchers at Goldman Sachs discussed in a new report, “Can the US Stock Rally Persist as the Dollar Declines?”

The report said institutional investors are as hopeful as they have been since January of this year, with 51% of the 800 surveyed saying they are bullish on equities and 32% calling themselves bearish.

Bullish on the Magnificent 7

The bullish sentiment on large caps seemed most focused on the Magnificent 7 stocks – NVIDIA (Nasdaq: NVDA), Apple (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT), Alphabet (Nasdaq: GOOG), Amazon (Nasdaq: AMZN), Meta (Nasdaq: META), and Tesla (Nasdaq: TSLA).

Of those surveyed, 66% said they plan to either hold their investments in these mega cap technology superstars or add to their positions.

“The view on the Magnificent 7 is basically as strong as it was in 2024,” Oscar Ostlund, global head of content strategy, market analytics & data science for Marquee in Goldman Sachs Global Banking & Markets, said.

One of the major reasons, he said, was continued and growing optimism about artificial intelligence (AI) and its ability to drive earnings for the largest technology stocks. Another key factor is a more dovish Fed, as investors believe it is more likely that the Fed will start lowering rates sooner than expected.

Tariff concerns overblown?

In addition, there is rising sentiment that geopolitical risks have moderated, along with a growing acceptance of higher tariffs. Companies are putting in place measures to mitigate the impact of tariffs and investors are factoring higher tariffs into their expectations.

“Investors seem to be very cool about tariffs. A 10-15% effective tariff rate is seen as the new normal,” Ostlund said.

Further, according to Goldman researchers, investors may be viewing the tariff concerns as overblown, given that global trade has remained resilient.

“There was this fear that the US was removing itself from global trade at the beginning of April, and I think that fear has largely been quashed,” said Brian Garrett, who oversees equity execution for the cross-asset sales desk in Goldman Sachs Global Banking & Markets. 

A rare occurrence

This all seems to offset fears of a weakening dollar, the researchers said. The percentage of respondents who are bullish on the dollar is just 10.7%, which is near an all-time low, according to the survey, based on US fiscal concerns.

“One of the most important paradigm shifts over the last couple of months has been the decoupling of the dollar and US equities,” Ostlund said.

The combination of a bullish view of stocks and a bearish perspective of the dollar has only coincided three times since 2016, with the last coming in January 2024. There is clearly a disconnect, as investors are usually more bullish on the prospect of economic growth, said Garnett

“When you look at the returns of the equity market, the biggest driver is economic growth. And if the US economy is growing at a fast pace, you’d think the dollar would get stronger,” Garrett said.

Ultimately, this rare occurrence is something that investors should be wary of.

“In itself, a very strong consensus is not a reason for the market to turn, but it makes for a market that’s susceptible to relatively sudden changes based on even minor catalysts,” Ostlund said.

More By This Author:

Why Is Netflix Stock Down 5% After Strong Q2 Earnings?
The Best Value Stock to Put On Your Radar
How Will Trump’s Tariffs Impact Earnings?