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Citi: S&P 500 not representative of broader US economy By

Citi: S&P 500 not representative of broader US economy By
Citi: S&P 500 not representative of broader US economy

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Citi Strategists Reiterate That S&P 500 Does Not Directly Reflect Broader U.S. Economy

In a recent note, Citi strategists have emphasized that the S&P 500 does not necessarily mirror the broader U.S. economy. They argue that the index's performance is influenced by various factors beyond just macroeconomic trends. According to the bank, structural changes favoring companies with efficient business practices and the incorporation of generative AI technology have reduced the index's sensitivity to economic fundamentals compared to historical norms.

Citi's base case value for the S&P 500, derived solely from macroeconomic inputs, is approximately 4600. However, taking into account 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 a significant portion of the current index levels is driven by growth factors less related to economic conditions.

The analysts also highlight that the correlation between S&P 500 earnings and gross domestic product (GDP) has notably fallen over time, indicating that the index's valuation is heavily impacted by idiosyncratic growth drivers, particularly from mega-cap growth companies. Citi's analysis shows that the S&P 500's valuation is supported by "higher through-cycle profitability," bolstered by technological improvements and shifting business priorities post-pandemic.

Furthermore, the analysts assert that "bubble risk" at current levels is minimal, with less than 15% downside. This analysis provides a different perspective on the relationship between the S&P 500 and the broader U.S. economy, emphasizing the influence of structural and technological factors on the index's performance.