The market's recent bounce will likely be short-lived due to the strong dollar, Morgan Stanley says

Published Mon, Jul 11 20221:27 PM EDTUpdated Mon, Jul 11 20222:23 PM EDT

Don't expect the market's recent bounce to last, according to Morgan Stanley. The S & P 500 has popped more than 5% since falling into a bear market in June. Still, the benchmark index is down more than 18% for 2022 and roughly 20% below a record high set in January. However, Morgan Stanley chief investment officer Michael Wilson thinks those gains could be short-lived due to a historically strong U.S. dollar. The dollar index , which measures the greenback's performance against six other major currencies, is up more than 17% year over year and 12.6% for 2022. "This dollar strength is just another reason to think earnings revisions are coming down over the next few earnings seasons," Wilson wrote in a note released Sunday. "Therefore, the recent rally in stocks is likely to fizzle out before too long." S & P 500 companies including PepsiCo, Delta Air Lines and JPMorgan Chase are slated to report results this week, kicking off the second-quarter earnings season. Many of the companies in the S & P 500 derive a huge chunk of their revenue from overseas, which means that a strong dollar could hurt their bottom lines. Last week, Piper Sandler slashed its estimates on Microsoft , citing the recent dollar strength, while Goldman Sachs recently put together a basket of most exposed U.S. stocks, saying domestically oriented stocks have outperformed. "The simple math on S & P 500 earnings from currency is that for every percentage point increase in the dollar on a year-on-year basis it's approximately a 0.5x hit to EPS growth. At today's … level, that translates into an 8% headwind for S & P 500 EPS growth, all else equal," Wilson said. The dollar's outperformance — which Wilson said is "about as extreme as it gets historically" — comes as the Federal Reserve has moved to tighten monetary policy in its efforts to stave off surging inflation. The central bank isn't expected to ease its tightening for some time, which threatens to put even more upward pressure on the dollar — thus hurting stocks in the process. "Ultimately, the Fed wants a meaningful economic slowdown to curtail inflation and a stronger dollar is part of that cocktail," according to Wilson. — CNBC's Michael Bloom contributed to this report.