By Paul R. La Monica

The notion of American economic exceptionalism hasn't exactly panned out so far this year. The U.S. stock market is lagging behind its peers as investors, worried about a trade war, look beyond Wall Street.

But don't count it out just yet.

Mike Wilson and his equity strategy team at Morgan Stanley said in a report Monday the S&P 500 could be about to enjoy a "tradeable rally" thanks to a weaker dollar, stabilizing earnings revisions for the Magnificent Seven companies, and hopes for more rate cuts from the Federal Reserve later this year.

The recent pullback in the dollar is a big factor that could drive U.S. outperformance, Wilson and his colleagues noted. The U.S. Dollar Index has fallen about 5% since President Donald Trump's inauguration in late January.

A weaker greenback will help boost earnings for multinational companies that do big business overseas. That includes the likes of Apple, Microsoft, Google owner Alphabet, and the rest of their Magnificent Seven counterparts.

"This should offer a tailwind for US revisions and is one reason we think relative performance versus international developed equities can swing back in favor of the US in the near-to-intermediate term," the Morgan Stanley strategists wrote.

They added that "Mag 7 earnings revisions look like they may be bottoming, which could also support a rotation back to the US."

The Roundhill Magnificent Seven exchange-traded fund has tumbled more than 10% this year, led by a 33% plunge in shares of Tesla.

Others argue the tech giants of the Nasdaq are due for a rebound.

"There are real earnings and decent valuations in megacap tech," said Jim Lebenthal, partner and chief equity strategist at Cerity Partners. Lebenthal told Barron's that Alphabet, Microsoft, and Nvidia look more attractive now.

Alphabet trades for under 20 times earnings estimates for this year while Nvidia's P/E of 25 is near a five-year low. Microsoft is a little pricier, at 30 times this year's earnings estimates, but that is still slightly below its five-year average.

Paul Feinstein, founder and CEO of Audent Global Asset Management, said it is hard for investors to ignore Nvidia and other top techs given how strong their fundamentals are.

"You still want growthy stocks," he said in an interview with Barron's. "With all the noise in the market, the Magnificent Seven got hit first...but you also have to think about their market dominance."

Yes, investors should probably continue to allocate money to international stocks. Global diversification is a smart and sensible strategy.

But don't count out the Magnificent Seven or other large American companies just yet, either.

"The narrative about the end of U.S. exceptionalism is probably overplayed," said Russ Brownback, co-portfolio manager of the BlackRock Strategic Income Opportunities Fund.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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March 24, 2025 14:51 ET (18:51 GMT)

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