Citi strategists have reiterated their stance that the does not directly reflect the broader U.S. economy. Although it is certainly being influenced by macroeconomic trends, the index’s performance is significantly driven by other factors, the bank said.
“We continue to argue that the S&P 500 is not beating to the same drum as is the broader US and global economy,” analysts said in a note.
“Thus, the common view toward large-cap equities from a traditional macro lens needs perspective. Essentially, index composition changes favoring structural growers (e.g., Mag 7), more efficient business practices courtesy of technology enhancements, redefined business priorities post the pandemic” and the rush to incorporate generative AI technology, all contribute to a reduced sensitivity to economic fundamentals compared to historical norms, Citi noted.
According to Citi, a base case value for the S&P 500 derived solely from macroeconomic inputs is approximately 4600. However, considering structural tailwinds, including technological advancements and the influence of 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, said analysts.
In the note, they further argue that the correlation between S&P 500 earnings and gross domestic product (GDP) has notably fallen over time. This decoupling indicates that while…
