Citi Research says its model places the S&P 500 above its fair-value range, as AI-related earnings expectations and changes in equity ownership weaken the link between Treasury yields and stock valuations.
The index was at 22.4 times earnings, against a range of 17.1 to 22.1, leaving it 0.3 points above the model’s ceiling.
Since late August, cyclical and defensive shares have weakened alongside rising rates, while growth stocks have been more resilient on expectations of AI-related earnings gains, the report said.
Mixed economic indicators led Citi Research to suggest that expected government debt issuance may account for some of the yield rise, rather than an overheating economy alone.
Among the supports Citi Research lists are a shift from defined-benefit to defined-contribution plans, younger cohorts’ equity-heavy target-date funds and foreign investment in U.S. stocks. The report leaves the next source of equity demand unresolved.
