The U.S. dollar index, which tracks the dollar against a weighted basket of six foreign currencies, including the EUR/USD and the USD/JPY, recently fell to its lowest level since April 2022. This may reflect a sustained shift in safe-haven preference among many investors and central banks.
Approximately 40% of S&P 500 revenues come from abroad, and a 3–4% dollar drop materially boosts earnings and is positive overall for stocks. A weak U.S. dollar can benefit specific segments of the U.S. stock market, but the overall impact depends on the broader economic context.
Positives
U.S. companies generating significant revenue abroad gain an advantage as their products become cheaper and more competitive globally. Prominent multinationals like McDonald’s Corporation (NYSE:MCD), Procter & Gamble Company (NYSE:PG), and tech firms with substantial international sales often see improved earnings when the dollar weakens.
A weaker dollar can also lift stock prices by making dollar-denominated stocks less expensive and more attractive to foreign investors.
As the dollar declines, U.S. goods and services become more affordable for international customers, so a weakening dollar can enhance export competitiveness. This shift can increase revenues for multinational companies, ultimately raising their profits.
Furthermore, shareholders may benefit from higher dividends, as seen with firms like McDonald’s and Procter & Gamble, which tend to increase dividends during periods of dollar weakness. Industries such as manufacturing, consumer goods, agriculture, technology, healthcare, and energy will likely benefit from a weaker dollar.
Historical Context
The dollar’s decline has historically correlated with stronger performances in U.S. equities, especially those operating internationally. This relationship, however, isn’t absolute, and the dollar and stocks can drop together in times of economic distress or trade policy uncertainty.
A weaker dollar typically advantages U.S. companies with significant international sales and exporters, yet it can adversely affect businesses reliant on imports. The overall effect on the stock market depends on the interaction between these sectors and the wider economic environment.
Risks
Investing in U.S. stocks when the dollar is weak has numerous risks, even though some companies may benefit from currency depreciation.
A weak dollar can make U.S. assets less appealing to foreign investors, particularly if they expect further depreciation or uncertainty in policy. This may result in outflows from U.S. equities, exerting downward pressure on stock prices. For investors holding global portfolios, currency losses can negate gains in U.S. equities when denominated in stronger foreign currencies.
Recent trends show foreign investors selling U.S. stocks at record levels, which can amplify market volatility and reduce demand for U.S. equities.
A weaker dollar often leads to higher import prices, raising costs for U.S. companies that rely on foreign goods and materials. Firms heavily dependent on imported raw materials or products face increased expenses, which can reduce profit margins and negatively affect their stock performance, particularly in import-sensitive sectors like electronics manufacturing.
Increasing import expenses can also contribute to general inflation, reducing consumer purchasing power, and potentially impacting company profits. Should the dollar remain weak, the real returns on U.S. stocks after adjusting for inflation could decrease.
Although a weak dollar can occasionally benefit U.S. stocks, there are instances when both the dollar and equity markets weaken simultaneously. This unusual situation may suggest underlying economic or policy problems, increasing investor risks. Such times can signal waning confidence in the U.S. as a safe haven, leading to capital outflow and increased market volatility.
Policies such as tariffs or initiatives to lower deficits, which may devalue the dollar, can limit economic growth and corporate profits.
This is especially true if they provoke trade disputes or retaliatory measures from other countries. This uncertainty may result in higher risk premiums for U.S. assets, making stocks more volatile and less appealing than global alternatives.
David Rosenstrock, CFP®, MBA, is the Director and Founder of Wharton Wealth Planning (https://whartonwealthplanning.com/ ). He earned his MBA from the Wharton Business School and B.S. in economics from Cornell University. He is also a CERTIFIED FINANCIAL PLANNER™.