Citi says interest rates may matter more for economy than stock valuations

Citi analysts have suggested that interest rates may have a more significant impact on economic growth expectations than on stock market valuations. This is due to the influence of artificial intelligence tailwinds and structural shifts in investor behavior that are altering the traditional relationship between bond yields and equities.

While higher borrowing costs remain important for the economic outlook, their impact on stock market valuations and cross-asset flows has diminished over time. Citi's proprietary fair value model, which incorporates the 10-year U.S. Treasury yield and macroeconomic adjustments, puts the S&P 500's fair value range at 17.1 to 22.1 times earnings, while the index currently trades at 22.4 times, suggesting valuations reflect stretched sentiment and complacent investor positioning.

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