A surge in bond yields could cause the S&P 500 to tumble 17% from its current level, according to a Goldman Sachs research note looking into factors that could cause the benchmark index to rise or fall more than expected.
Goldman analysts, led by chief US equity strategist David Kostin, said a sharp rise in the 10-year US Treasury yield to 2.5% by the end of the year would weigh on stock prices by making companies’ dividends look less attractive.
Such a jump in yields would imply a fair value for the S&P 500 of just 3,550, Goldman said – around 17% below Monday’s closing price of 4,290.61.
Yet Goldman and the rest of the market believe bond yields are very unlikely to rise that far. Such a jump would require a much bigger-than-expected rise in inflation, which many investors now think is peaking.
Goldman reckons the 10-year US Treasury yield will rise to 1.9% by the end of the year and the S&P 500 will climb to 4,300. But the bank added: “This future is not guaranteed.”
The bank’s note was typical of the reflective thinking about stocks currently taking place on Wall Street. The S&P 500 has jumped more than 14% in 2021 to a record high. And the index has already exceeded institutions’ average year-end target, according to Bloomberg data, causing nervousness.
Stronger-than-expected inflation is another danger, Goldman said. “Elevated inflation would likely lead to more Fed tightening than we now expect, raising rates and reducing equity valuations,” Kostin and co. wrote.
However, Goldman said stocks would rise more than expected if President Joe Biden failed to raise corporation and income taxes. It predicted the S&P 500 could climb to 4,500 by the end of the year in a “no tax reform” scenario.
And if bond yields stayed at around their current level of 1.5% until the end of the year, making stocks look more attractive, the S&P 500 could shoot up to 4,700.
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