US stocks are surviving an increase in Treasury yields because of the positive economic outlook, but Goldman Sachs strategists warned that this might change if factors like tighter monetary policy push yields higher or if they climb too quickly.
In their most recent weekly kickstart note, Goldman equity strategists lead by David Kostin stated that since long-term rates started climbing last July, the S&P 500 and 10-year Treasury yield had been negatively correlated, or had moved in opposing directions.
During that time, the S&P 500 experienced a significant sell-off as yields increased to a 16-year high in October, which made stocks less appealing overall. As rates, which are inversely correlated with bond prices, fell in the latter few months of the year, stocks quickly recovered.
In 2024, however, stocks have hit record highs even as the 10-year yield has risen about 30 basis points to 4.2%. One reason for stocks\u2019 resilience is the improving economic outlook, Goldman\u2019s strategists said.
Since 1990, the S&P 500 has generated a median monthly return of 1.3% when the yield curve steepens, their data showed.
Returns have been substantially stronger when economic growth expectations are improving rather than weakening, regardless of whether the yield curve steepened or flattened, the strategists said.
\u201cAs investors worry less about the potential for Fed tightening, growth expectations should become a more important driver of yields, contributing to a less negative correlation between stocks and yields in 2024,\u201d they wrote.
In a separate note, Goldman\u2019s economists raised their fourth-quarter economic growth estimate to 2.4% from 2.1%.
The S&P 500 could close 2024 at 5,100, up slightly over 4% from Friday’s closing, according to Goldman’s forecast. The strategists added, “Equities will likely struggle if rates rise significantly from current levels due to shifts in Fed policy or the balance of Treasury supply and demand.”
Furthermore, they stated that regardless of the cause, stocks will be under pressure if Treasury yields increase faster than they have recently, stressing that rates may be more volatile following the 2024 election.
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