The Stock Market Is Up, but the Dollar Is Down. What It Means for You.

Donald Trump signs a dollar bill for a supporter during a campaign rally. (Chip Somodevilla/Getty Images)

Don’t look now, but the stock market and the U.S. dollar are streaking—in opposite directions.

The S&P 500 index , which has climbed 12% percent year to date—and some 30% since its post–Liberation Day low in early April—is taking the high road, while the greenback has slid 9% over the same period, a pullback of historic proportions.

Questions abound. Why is this happening? How unusual is it? And what the heck does it portend for investors going forward?

The first answer might come from Captain Obvious. Investors are strongly bullish on prospects for U.S. companies, particularly Big Tech names benefiting from the artificial-intelligence boom. At the same time, a good number of non-U.S. investors are bearish on the U.S. economy, pointing to tariffs, simmering inflation, public debt, a possible government shutdown, and threats to Federal Reserve independence. The former investors are buying; the latter are selling or going short the dollar. (Foreigners hold $18.5 trillion, or 20%, of U.S. equities and $8.5 trillion, or 30%, of U.S. Treasuries, according to Torsten Sløk, Apollo Global Management’s chief economist.)

A rising market and falling dollar “are consistent,” says James Lord, Morgan Stanley’s chief global FX strategist. “The stock market is not the economy.” Lord also points to the weakening dollar boosting big U.S. exporters this year: “We actually think that a weaker dollar is an underappreciated tailwind for U.S. equities and earnings of the multinational companies. The S&P 500 earns approximately 40% of revenue abroad. There’s a strong correlation between earnings revisions and how the dollar behaves. These things feed off each other.” Investors who followed Morgan Stanley’s recommendation of going long U.S. equities and Treasuries and short the dollar made out.

In other words, the dollar/market disconnect is more of a paradox than a contradiction, and the greenback and S&P 500 aren’t particularly correlated—though a divergence of this magnitude is unusual. According to a Goldman Sachs survey of institutional investors, “Financial markets reflect an unusual combination of bearish sentiment toward the dollar and a bullish view on U.S. stocks.” Dollar bears outnumber bulls by more than 7:1, the highest level in almost 10 years of running the survey.

“The main driver of why some currencies do better is simply because, in relative terms, interest rates are higher in those countries,” says Sløk. “For a long time, the U.S. has had strong growth and higher interest rates, which is why the dollar kept on going up.” But fears of a tariff war, in particular, he says, overrode higher U.S. rates, weakening the dollar.

“When the trade war began, the dollar depreciated much more than what would have been predicted by interest-rate differentials,” Sløk says. Now the Fed is cutting interest rates, essentially adding fuel to the dollar’s decline. (U.S. investors can get a boost from the falling dollar by buying foreign stocks, mutual funds, and exchange-traded funds.)

And what does President Donald Trump have to say about the dollar? “When we have a strong dollar, it makes you feel good, but you don’t do any tourism,” he said to a reporter. “You can’t sell tractors; you can’t sell anything. It is good for inflation, and we wiped out inflation.…I will never say I like a low currency, [but] you make a hell of a lot more money with a weaker dollar than with a strong dollar.”

Marc Chandler, chief market strategist at Bannockburn Global Forex, thinks the dollar was overvalued, as measured by purchasing power parity—meaning the basket of goods the dollar buys relative to what can be purchased by other currencies was too high. “We’ve had three dollar rallies over the past 50 years, with the last one beginning after the global financial crisis,” he says. “The third one has ended, and we are headed down.”

How low could the dollar go? Morgan Stanley notes that the dollar’s drop this year is the biggest decline since 1973 and says the greenback “could lose another 10% by the end of 2026.”

But wait. The guy at the firm across the street has the exact opposite take.

Anshul Sehgal, global co-head of fixed income, currency, and commodities at Goldman Sachs Global Banking & Markets, thinks this dollar decline is just a blip. “The dollar is cheap,” he says. “In a world that is as fragmented as this, the dollar continues to be an excellent store of value. I believe that the dollar is in a secular bull market.”

Bottom line: Equity investors’ obsession with AI has pushed the market-cap-weighted S&P 500 so high, while global investors’ fear and loathing of the U.S. macro picture has tanked the dollar so low, that it has produced a pronounced gap. When one trend breaks, mind that gap.

Write to Andy Serwer at andy.serwer@barrons.com. Follow him on X and subscribe to his At Barron’s podcast.