S&P 500 Trades Above Fair-Value Range as AI Supports Stocks

The S&P 500 is trading above the estimated fair-value range, while AI-driven earnings expectations and changes in stock ownership are weakening the traditional link between Treasury yields and equity valuations.

The S&P 500’s price-to-earnings multiple is 22.4, above the estimated fair-value range of 17.1 to 22.1. Higher interest rates may weigh more on economic growth expectations than on stock valuations.

The effect has differed by sector. Since late August, cyclical and defensive stocks have faced pressure as rates rose. Growth stocks have held up better, supported by expectations for AI-related earnings growth.

The recent rise in Treasury yields may partly reflect increased government bond supply rather than an overheating economy. A shift toward defined-contribution pension plans, younger investors’ preference for higher stock allocations and continued overseas investment in U.S. equities are also supporting valuations.

The source of additional demand for stocks remains an open question.