Diverging Central Bank Policy to Fuel Strong Dollar, Tighter Conditions and Potential Equity Valuation Reset

• Divergent monetary policy paths between the Fed and ECB likely to drive further dollar strength versus the euro and other currencies • Strong dollar will tighten financial conditions, negatively impact earnings of multinationals, and lead to contraction in S&P 500 PE ratio • Credit spreads widening in response to dollar strength, signaling tighter financial conditions ahead • Tighter conditions will weigh on equity valuations and reset from current lofty levels • How much the S&P 500 falls will depend on extent of spread widening, but path much lower is possible