Citi: AI Boom Weakens US Stocks' Sensitivity to Rising Rates, S&P 500 Valuation Already Above Fair Range

On October 18, citing Zhitong Finance, Citi analysts believe AI-driven earnings growth and changes in investor shareholding structure are weakening the traditional link between US Treasury yields and US stock valuations, and that rising rates may have a greater impact on economic growth expectations than on stock valuations. The firm's valuation model shows the S&P 500's fair P/E range is 17.1x to 22.1x, while the current P/E has reached 22.4x, reflecting relatively optimistic market sentiment.

Citi noted that since late August, cyclical and defensive stocks have been dragged down by rising rates, while growth stocks have held up relatively well thanks to AI earnings expectations. In addition, the recent rise in US Treasury yields may partly stem from increased government bond supply rather than an overheating economy. The shift of pension systems toward defined-contribution plans, younger investors' preference for higher equity allocations, and continued inflows of overseas capital are also supporting US stock valuations. However, Citi believes the key question facing the current market is what additional capital can continue to drive the stock market higher.