Stocks are getting a boost from an unexpected source

Stocks are back near record highs, and they have a surprisingly weak US dollar to thank.

After President Donald Trump's shocking victory in November sent the dollar surging into year-end, it was widely expected that it would continue to climb.

Then, amid doubts that the pro-growth agenda floated by Trump would get done in timely fashion, the dollar's fortune reversed, shocking just about everyone. And it's done so in spectacular fashion, falling roughly 8% since the start of 2017.

That's resulted in an unexpected boost for US corporate earnings that are already the best in five years. A weaker dollar makes exports more profitable, which helps companies doing business overseas — most notably the multinational conglomerates with big weightings in stock indexes. And good, old-fashioned profitability has historically been the biggest driver of equity bull markets.

"The US dollar has been exceptionally and unexpectedly weak this year," a group of Morgan Stanley strategists led by Michael J. Wilson wrote in a client note. "A weaker US dollar is positively related to S&P 500 sales growth and earnings revisions."

Even if the US dollar climbs 5% from current levels through year-end, S&P 500 revenue growth will still rise.

Source: Bloomberg Pro Terminal

Trader Bozhidar Arabadzhiev

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