Citi strategists have emphasized that the performance of the S&P 500 does not directly mirror the broader U.S. economy, although it is influenced by macroeconomic trends. The bank stated that other factors significantly drive the index’s performance.
In a note, analysts mentioned that the S&P 500 is not closely aligned with the overall U.S. and global economy. This divergence is due to changes in index composition that favor structural growers, more efficient business practices through technology enhancements, redefined business priorities post-pandemic, and the integration of generative AI technology.
According to Citi, a base case value for the S&P 500 based solely on macroeconomic inputs is around 4600. However, when considering structural tailwinds like technological advancements and generative AI, the index could be fairly valued at 5500, within a range of 4900 to 6200. This suggests that 300 to 700 points of the current index levels are driven by growth factors less related to economic conditions.
Citi’s analysis indicates that the correlation between S&P 500 earnings and GDP has decreased over time, showing a disconnect between economic conditions and market fundamentals. The bank believes that the S&P 500’s valuation is heavily influenced by idiosyncratic growth drivers, particularly from mega-cap growth companies, and is supported by higher through-cycle profitability due to technological improvements and shifting business priorities post-pandemic.
Furthermore, Citi analysts assert that the risk of a bubble at current index levels is minimal, with less than a 15% downside.