S&P 500 May Extend Rally On Stimulus Hopes And A Weaker US Dollar


  • US stocks may rise amid strong earnings, vaccine rollouts, and fiscal stimulus hopes.
  • A weakening US Dollar and lower Treasury yields may alleviate pressure on risk assets.
  • The S&P 500 index is trading around a 31.9 price-to-earnings (P/E) ratio, far above its five-year average.

Global stocks seem to be back to a ‘risk on’ mode after a brief pullback seen at the end of January. Investor confidence appeared to be revitalized by stimulus hopes, a retreat in the US Dollar, as well as strong Q4 corporate earnings. US lawmakers are working towards approving President Joe Biden’s US$ 1.9 trillion fiscal stimulus bill, which led to rising reflation hopes – expectations that demand and output will pick up with the help of aggressive fiscal spending.

The DXY US Dollar index and the S&P 500 index tend to exhibit a negative relationship, with the past 12-month correlation coefficient standing at -0.912 (chart below). This suggests that the fundamental forces pulling the Greenback away from recent highs may also alleviate downside pressure in the S&P 500 index.

In 2018, over 40% of sales in S&P 500 companies came from overseas, according to S&P Global. Thus, a weaker US Dollar may boost overseas sales by making them relatively cheaper when foreign exchange differences are taken into consideration. For emerging markets, a softer USD may also encourage capital inflows and thus buoy asset prices.

S&P 500 vs. Dollar Index

Source: Bloomberg, DailyFX

On the fundamental side, an improving recovery outlook and robust Q4 corporate earnings may continue to support equity prices. This is as the job market shows signs of improvement, with the vaccine rollouts helping to bring down daily COVID-19 infections rapidly over the past few weeks. Weekly jobless claims have declined since early January, reflecting an improvement in labor market sentiment (chart below).

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