Citi's latest analysis highlights an unusual macroeconomic environment impacting the S&P 500, where good economic news is translating into negative equity market reactions. This "good news is bad news" regime, driven by negative correlations between the Citi Economic Surprise Index and the S&P 500, has persisted since early December and may continue through much of Q1 2025. Citi analysts note, "The degree to which the correlation between the Citi Economic Surprise Index and the S&P 500 has turned negative, and the duration of this relationship are notable."
Key drivers include negative real rate correlations and a flipped breakeven relationship, with the 10-year yield being particularly influential. Additionally, tariff risks are affecting the dollar, leading to a more negative equity-greenback correlation. As the Fed meeting approaches, Citi emphasizes the importance of monitoring macro influences, suggesting that "short-term macro correlations have us most focused on equity market responses to changes in 10-year yields, both nominal and real, as well as dollar action." This complex macro landscape underscores the challenges facing investors amid high valuations and euphoric sentiment.