The dollar rally is continuing.
The U.S. dollar index, a basket of currencies versus the greenback, hit an eight-year high after the European Central Bank announced its monetary stimulus plan. With more euros floating around, each one is anticipated to be worth less compared to the dollar.
But with nearly half of all revenues for companies in the S&P 500 coming from overseas, some worry that a strong dollar may be a ticking time bomb for stocks in the U.S.
However, some traders say a dollar rally is a positive signal for shares.
“The dollar will continue to strengthen so investors want to be overweight U.S. equities,” said Chad Morganlander, portfolio manager at Washington Crossing Advisors. While he expects the greenback to be a slight drag on the revenue growth in 2015, Morganlander believes topline growth will nonetheless be around 2.7 percent while he forecasts earnings growth in a range between 4 and 5 percent.
“Dollar strength bodes well for the overall U.S. stock market,” he said. “We are anticipating 5 to 6 percent total returns for the S&P 500.”
“The rising dollar won’t kill this rally,” Morganlander added.
The data back up Morganlander’s assertions, according to Craig Johnson, senior technical research analyst at Piper Jaffray.
Johnson compared price movements in the U.S. dollar index against the S&P 500 over the last four decades and concluded that they often move in tandem.
“When you get … dollar strength, it looks like you’re bringing in money coming back into the U.S. and international coming in,” he said. “The inflow of dollars offsets any sort of headwind you get in the short to intermediate term to earnings. So you do see the dollar strengthen and also the S&P 500 go with it.”
Johnson, who is also president of the Market Technicians Association, is more bullish than Morganlander on the index. He has a year-end price target of 2,350, about 14 percent higher than current prices.
Based on his charts, the key will be for the S&P 500 to break above its January highs of 2,064. Should it do that, Johnson expects it to test its all-time high at 2,093.55.
“I think a topside breakout above those January highs sets us up to retest the December highs and ultimately make new highs,” he said.