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Investing.com -- Goldman Sachs said trade-related legal developments drove the S&P 500’s recent 2% gain, but investor focus is shifting to the potential risks posed by rising bond yields.
Despite elevated rates, the firm maintains a 12-month S&P 500 return forecast of 10%, targeting 6,500.
“The nominal 10-year U.S. Treasury yield is now at 4.4%, with the term premium reaching its highest level since 2014,” Goldman noted. Its rates team expects the yield to end 2025 at 4.5% and rise slightly to 4.55% in 2026.
Goldman emphasized that the cause and pace of rising yields are more critical to equities than the absolute level.
“Equities typically appreciate alongside rising bond yields when the market is raising its expectations for economic growth,” the analysts said. However, they added that stocks tend to struggle “when yields rise due to other drivers, like fiscal concerns.”
The firm pointed out that large, rapid moves in yields, specifically more than 60 basis points in a month, have historically weighed on equities, regardless of the underlying reason.
Still, Goldman believes elevated yields alone are unlikely to derail earnings for the S&P 500. “Most S&P 500 debt carries a fixed rate with a maturity later than 2028,” the analysts said.
In contrast, small-cap stocks are seen as more exposed, given their higher levels of floating-rate debt and thinner profit margins.
Goldman’s models suggest yields will constrain valuation expansion, but current equity prices remain “close to fair value due to strong corporate fundamentals.”
The firm continues to advise avoiding weak balance sheet stocks in the current high-rate environment.