The S&P 500 does not reflect the broader US economy as it is influenced by macroeconomic trends, but its performance is mainly driven by other factors according to Citi strategists. They argue that the index is not closely tied to the broader US and global economy, and traditional macroeconomic views need to be reevaluated.
Factors such as index composition changes favoring structural growers, technological enhancements in business practices, new business priorities post-pandemic, and the adoption of generative AI technology all contribute to reducing sensitivity to economic fundamentals. Taking into account structural tailwinds like technological advancements and generative AI’s influence, the S&P 500 could be fairly valued at 5500 within a range of 4900 to 6200. This indicates that a significant portion of the index’s current levels are driven by growth factors less connected to economic conditions.
The correlation between S&P 500 earnings and GDP has decreased over time, suggesting that while the economy impacts market fundamentals and investor sentiment, the index’s valuation is also influenced by unique growth drivers, especially from large-cap growth companies. Citi analysis reveals that the S&P 500’s valuation is supported by higher through-cycle profitability due to technological advancements and shifting business priorities following the pandemic.
Additionally, Citi analysts believe that there is minimal “bubble risk” at current index levels, with less than 15% downside. Their analysis suggests that the S&P 500’s valuation is bolstered by factors beyond traditional economic indicators, indicating its resilience to economic fluctuations.
