Citigroup: AI Boom Weakens U.S. Stocks' Sensitivity to Rising Rates, S&P 500 Valuation Exceeds Reasonable Range

Citigroup analysts point out that the profit growth driven by artificial intelligence and changes in investor holding structures are weakening the traditional link between U.S. Treasury yields and U.S. stock valuations. The impact of rising interest rates on economic growth expectations may outweigh its effect on stock valuations. Citigroup's valuation model indicates that the reasonable price-to-earnings ratio range for the S&P 500 index is between 17.1 and 22.1 times, while the current price-to-earnings ratio has reached 22.4 times, reflecting an optimistic market sentiment. Since the end of August, cyclical and defensive stocks have been dragged down by rising interest rates, while growth stocks have performed relatively well due to AI profit expectations. The recent rise in U.S. Treasury yields may partly stem from increased government bond supply rather than an overheating economy. The shift of pension systems towards defined contribution plans, the preference of younger investors for high stock allocations, and the continuous inflow of foreign capital are also supporting U.S. stock valuations. Citigroup believes that the key question facing the current market is what new funds can continue to drive the stock market higher in the future.

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