Goldman Sachs: AI Rally Lifts U.S. Stocks but the Dollar Hasn't Kept Pace — Three Factors Explain the Divergence
N.R. Finch
The AI wave has pushed US stocks well ahead of global peers, yet the trade-weighted dollar hasn't followed — Goldman Sachs identifies outperformance structure, earnings durability, and market breadth as the three drivers of the gap, noting the dollar's catch-up hinges on the quality of the AI rally itself.
Who is the US outperforming — and why does that limit the dollar's gain?
US equity outperformance is concentrated against other developed markets (DM), not emerging markets (EM). This means → the FX spillover is structurally capped, because capital flows into US equities drive the dollar far more strongly against EM currencies than against DM currencies.
Asian tech-heavy markets such as South Korea have also rallied on AI expectations — some even outpacing the US — yet they sit outside the MSCI ex-US DM index. The headline "US beats the world" has a blind spot.
In plain terms = the US is winning mainly against Europe and Japan, the path that gives the dollar the least lift. The path that would move the dollar — beating EM — isn't where the gap is this time.
Earnings expectations look strong — why isn't the dollar buying it?
Goldman flags a key pattern: when the market's one-year US earnings forecast exceeds the two-year forecast — i.e. growth is expected to peak and then slow — the dollar tends to lag the level implied by equity performance.
This cycle fits that template exactly: near-term earnings estimates have surged, but the two-year consensus points to deceleration. This means → the market reads this earnings upgrade as a pulse, not a trend — and a short-lived spike in earnings generates far less dollar demand than sustained improvement would.
This reflects a deeper rule in FX markets: dollar traders price not just "how much is the US earning now" but "how long can it keep earning it." Earnings durability is the real switch for dollar demand.
Why does a narrow rally also weigh on the dollar?
The rally is concentrated in a handful of stocks. US market breadth has compressed to one of its narrowest levels in decades. Goldman measures this as the S&P 500's distance from its 52-week high minus the median constituent's distance from its own 52-week high.
The more concentrated the gains, the larger the dollar's underperformance relative to equities tends to be. In plain terms = when only a few stocks are rising and most aren't keeping up, the FX market doesn't price it as "broad US economic strength."
Goldman also draws a contrast with the earlier "software sell-off": global equities fell in sync with US stocks then, limiting the dollar impact. In this AI rally, global markets are also benefiting — some even more — so dollar support is similarly limited. A pro-cyclical, risk-on environment inherently weighs on the dollar.
Is this divergence one-directional — and what to watch next?
Goldman is clear that equities' overall drive on the dollar has already shifted from a drag (early in the year) to a support — the gap is narrowing, just not yet closed.
A meaningful US equity sell-off with other markets outperforming would still be a potential catalyst for dollar depreciation.
This means → the current divergence is not a one-way bet against the dollar. Whether the AI rally can sustain sufficient earnings durability and market breadth is the key test for whether the dollar can close the gap.
Content is for reference only, not financial advice.