A weakening US dollar will help power the stock market higher in the 2nd half of the year, Fundstrat says

• A falling US dollar will help power the stock market higher in the second half of the year, according to Fundstrat.
• The US Dollar Index has declined by 13% from its September high and recently broke below a key support level.
• A falling dollar is a tailwind for multinational companies and helps boost their earnings.

One of the big headwinds of 2022 that helped push stock prices lower is turning into a tailwind that should help power the stock market higher in the second half of the year, according to Fundstrat's Tom Lee.

That tailwind is a weakening US dollar, which according to a Monday note from Lee, should help lift profit margins for US multinational companies over the next two to three quarters.

A falling dollar helps US companies because when they sell their products overseas, they receive foreign currencies and convert them into dollars. A weak dollar, in tandem with stronger foreign currencies, means they receive more dollars when they convert their foreign currencies, ultimately helping boost profits.

The US Dollar Index, which measures the dollar against a basket of foreign currencies, has declined by 13% from its September high of about 115 to just under 100 today. The decline represents a breakdown in the dollar below a key support level, according to a recent note from Fairlead Strategies, suggesting that the weakness could persist.

"Recall, the surge in [the] US dollar in 2022 subtracted 5% to 7% from EPS results, so this payback should boost results for the next two to three quarters," Lee said.

And while second-quarter results are likely to be the worst quarter for year-over-year comparisons, based on current Wall Street estimates, they should represent the bottom and rebound in the third quarter.

"Our overall takeaway is that earnings comparisons will start to get easier in the next few quarters due to weaker US dollar, easier year ago EPS and stabilizing demand," Lee said.

The sectors that should see the biggest lift in earnings due to the weakening dollar are industrials and technology, which both have plenty of overseas exposure, he added.

Ultimately, Lee expects earnings to surprise to the upside, in part driven by the weaker dollar, and that should help lift the stock market to record highs.

"I think all-time highs are really the next target for the market broadly," he said.