If US dollar continues to fall, ‘there are better things to own than Nvidia’: Gavekal By Investing.com

The US dollar has been on a downtrend, and if that continues, there will be “better things to own than Nvidia” for investors, Gavekal Research said in a report on Monday.

The research firm highlighted that a weaker dollar could have a fundamental impact on the investment landscape, potentially challenging the dominance of high-flying US tech stocks such as Nvidia (NASDAQ: ).

Specifically, the report points out that historically, the strength of the US dollar has been a key factor in attracting capital to US stocks. However, as the Federal Reserve signals a more accommodative stance, with interest rate cuts on the horizon, the dollar may lose its luster.

“The change in US monetary policy is bearish for the US dollar,” Gavekal explains, which could in turn lead to a reallocation of global capital.

The firm laid out three potential scenarios for the greenback and its impact on equity markets.

1) The first scenario involves US policymakers trying to weaken the dollar but ultimately failing. In this case, the US remains the “cleanest dirty shirt” in the global economy, and capital continues to flow into US stocks, with Nvidia and its peers maintaining their strong performance.

2) The second scenario sees a weaker dollar leading to increased profitability for US companies, breaking the historical correlation between a strong dollar and strong US stocks.

“US stocks continue to perform well even as the US dollar weakens,” the report said.

3) The third and most critical scenario, according to Gavekal, is one in which the US dollar continues to fall, causing capital to flow into international markets.

In that case, investors may find better opportunities outside of high-value stocks like Nvidia, especially if the dollar depreciates by about 5% annually.

“Investors are deciding that if the US dollar is losing -5% a year, there are better things to own than Nvidia at 75 times earnings or Microsoft (NASDAQ: ) at 35 times,” Gavekal points out.

“So far, the market’s reaction to Powell’s speech lies somewhere between scenarios two and three,” the firm adds.

As Federal Reserve Chairman Jerome Powell spoke on Friday, the US dollar fell sharply, while commodities rallied. Meanwhile, equity markets also rallied, indicating some alignment with the second scenario.

However, in the equity space, its outperformance and the stronger emergence of energy stocks compared to technology signals a shift towards the third scenario.

If the dollar continues to weaken in the coming days, Gavekal strategists believe that the third scenario could prevail.