According to Citi Analysis, the Impact of Interest Rates on the Economy Diverges from Equities
Citi analysts stated that while interest rates retain their importance in economic growth expectations, their impact on stock markets has weakened. The S&P 500 valuation has exceeded the model limit.
According to evaluations by Citi analysts, while the impact of interest rates on economic growth persists, their impact on stock markets shows a tendency to weaken. It is stated that artificial intelligence-driven developments and structural changes in portfolio preferences are transforming the traditional relationship between bond yields and equities.
According to a report prepared by Citi analysts, while interest rates retain their importance regarding economic growth expectations, their effects on stock market valuations and investment flows between assets are weakening over time. Artificial intelligence-driven earnings expectations and structural changes in investors' portfolio preferences are differentiating the traditional bond yields and equities link.
The bank's fair value model calculates using macroeconomic adjustments, taking the yield on the U.S. 10-year Treasury note as a starting point. Within the scope of the model, the fair value range for the S&P 500 index was calculated as 17.1 to 22.1 times corporate earnings, while it was noted that the index is trading above the upper limit calculated by the model with a price-to-earnings ratio of 22.4 times.
In the evaluation, it was stated that the current high valuations may reflect extremity in investor sentiment and that positions against potential risks might not be sufficiently cautious.