History suggests the S&P 500 is set to rally on the back of the US dollar's recent weakness

• History suggests the S&P 500 can rise on the back of a two-month drop in the dollar against the yen.
• Bespoke outlined the pattern after the yen on Tuesday surged more than 4% against the greenback.

US large-cap stocks can get a boost from the dollar's recent drop against the Japanese yen, according to investment firm Bespoke, as the yen surged Tuesday on a surprise bond-market move by the Bank of Japan.

The yen over the past two months has tallied its largest double-digit percentage gain against the dollar since December 2008, and that kind of move can provide upside support for the S&P 500, the independent investment and research firm said in a note Tuesday.

Bespoke examined the dollar-yen exchange rate on Tuesday as the greenback fell as much as 4.3% to ¥131.01. The slide was triggered by the Bank of Japan unexpectedly lifting the country's long-running cap on its 10-year bond yield.

For US-based multinational companies, dollar weakness can help make the products they sell less expensive for holders of other currencies to purchase. Dollar strength also lowers the value of international sales when converted back to dollars. S&P 500 companies generated more than 40% of revenues outside the US, FactSet said earlier this year.

While the dollar remains up about 14% against Japan's currency in 2022, it has lost about 14% through Tuesday since soaring above ¥151 in October.

"Going back to 1972, there have only been a limited number of other times that the dollar fell (or the yen rallied) this much in the span of two months," said Bespoke. "For the S&P 500, the weakness versus the yen tended to be positive for US stocks."

One month out from a double-digit dollar decline versus the yen, the S&P 500 has been higher 62% of the time, it said. Three, six, and twelve months later, US stocks rallied 85% of the time. In addition, respective median three-, six-, and 12-month returns of 8.2%, 16.1%, and 18.6% were more than double their historical averages.

"In the one-year timeframe, every occurrence since 1978 has experienced positive returns with just two periods posting less than double-digit percentage gains," the firm said.

But Bespoke cautioned that the S&P 500 moving forward may not follow the historical pattern it had outlined.

Still, the S&P 500 was slightly higher on Tuesday, aiming to break a string of four losses. The index has slumped about 20% this year.

The yen has struggled against the dollar in 2022 as the Federal Reserve has aggressively raised interest rates while the Bank of Japan has kept keep its rates at –0.1%. The BOJ in October spent more than $40 billion in October defending the yen, according to the Financial Times.

The BOJ on Tuesday widened the targets in its bond market yield curve controls to allow Japan's 10-year bond yield to move between 0.5% and -0.5%, compared with between 0.25% and -0.25% previously. The Bank of Japan since 2016 had maintained a cap on its 10-year bond yield in an effort to fight deflation.

The central bank said the change in its yield curve control was aimed at improving market functioning. Bank of Japan Governor Haruhiko Kuroda in a statement signaled it doesn't want markets to interpret the change as an end of its ultraloose monetary policy.