Citi: AI Frenzy Reduces US Stock Market Sensitivity to Rising Interest Rates, S&P 500 Valuation Has Exceeded Its Reasonable Range

Citi analysts believe that AI-driven earnings growth and shifts in investor shareholding structures are weakening the traditional correlation between US Treasury yields and US stock valuations, and the impact of rising interest rates on economic growth expectations may be greater than its impact on equity valuations. The institution's valuation model shows that the reasonable P/E ratio range for the S&P 500 Index is 17.1 to 22.1 times, while the current P/E ratio has reached 22.4 times, reflecting a generally optimistic market sentiment. Citi notes that since the end of August, cyclical stocks and defensive stocks have been dragged down by rising interest rates, while growth stocks have remained relatively resilient supported by AI earnings expectations. In addition, the recent rise in US Treasury yields may partly stem from increased government bond supply rather than economic overheating. Shifts in pension systems toward defined contribution plans, younger investors' preference for high equity allocations, and sustained overseas capital inflows are also underpinning US stock valuations.

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