(Bloomberg) — For years, it seemed like nothing could stop the stock market’s unstoppable run, as the S&P 500 rose more than 50% from the start of 2023 to the end of 2024. Now, however , Wall Street sees what could ultimately derail this rally. Treasury yields are above 5%.
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Stock traders have shrugged off bond market warnings for months, focusing instead on President-elect Donald Trump’s promised tax cuts and the seemingly endless possibilities of artificial intelligence. stock prices fell in response.
The yield on 20-year US Treasuries breached 5% on Wednesday and bounced back on Friday to hit the highest level since Nov. 2, 2023. , 2023. That yield rose by about 100 basis points in mid-September, when the Federal Reserve began cutting the fed funds rate, which fell by 100 basis points over the same period.
“It’s unusual,” said Jeff Blazek, managing director of multi-asset strategies at Neuberger Berman, of the sharp and rapid jump in bond yields during the first months of the easing cycle. Over the past 30 years, intermediate and long-term yields have been relatively flat or modestly higher in months when The Fed began a series of rate cuts, he added.
Traders are eyeing the policy-sensitive 10-year Treasury yield, the highest since October 2023 and fast approaching 5%, a level they fear could trigger a stock market correction briefly passed in October 2023, and before that we have to go back to July 2007.
“If the 10-year hits 5%, it’s going to be knee-jerk to sell stocks,” said Matt Perron, global head of solutions at Janus Henderson. can drop by 10%.”
The reason is quite simple. Rising bond yields make Treasury bond yields more attractive while increasing the cost of raising capital for companies.
The outflow to the stock market was evident on Friday, as the S&P 500 fell 1.5% for its worst day since mid-December, turned negative for 2025 and came close to erasing all gains from the November euphoria fueled by Trump’s election.
While there’s no “magic” in fixing 5% “out of round number psychology,” said Kristi Akulian, head of iShares Investment Strategy at Blackrock, that means a quick move in yields can make stocks difficult growth.
Investors are already seeing how. The S&P 500’s yield is 1 percentage point below what 10-year Treasuries last saw in 2002. In other words, the return on a significantly less risky asset than the U.S. stock benchmark hasn’t been good for a long time.
“When yields rise, it becomes more and more difficult to rationalize valuation levels,” said Mike Reynolds, vice president of investment strategy at Glenmede Trust.
Not surprisingly, strategists and portfolio managers are predicting a bumpy road ahead for stocks.Morgan Stanley’s Mike Wilson expects a tough six months for stocks, while Citigroup’s wealth division told clients there is room to buy bonds.
The 10-year Treasury’s path to 5% became more realistic on Friday after strong jobs data led economists to lower expectations for a rate cut this year , on dovish central banks, sovereign debt and the extreme uncertainties presented by the incoming Trump administration.
“When you’re in hostile waters, yields above 5% are where all bets are off,” said Mark Malek, chief investment officer at Siebert.
What equity investors need to know now is if and when the buyers are serious.
“The real question is where do we go from here,” said Rick de los Reyes, a portfolio manager at T. Rowe Price 5% until it stabilizes and eventually goes down, then everything will be fine.”
The key is not whether yields are rising, but why, market insiders say. Slower growth as the U.S. economy improves could help stocks, but a quick jump on concerns about inflation, the federal deficit and policy uncertainty is a red flag.
In recent years, when yields have been rising rapidly, the difference this time is complacent investors, as seen in bullish valuations and Trump policy uncertainties, leave stocks vulnerable.
“When you look at rising prices, a strong labor market and an overall strong economy, that points to potential inflation,” said Eric Deaton, president of the Wealth Alliance. “And that’s not even including Trump’s policies.”
One area that could be a haven for stock investors is the group that has driven most of the gains over the past few years: Big Tech.The so-called Magnificent Seven companies, Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc., continue to record rapid revenue growth and huge cash flows.Looking ahead, they are expected to be the biggest beneficiaries of the AI revolution.
“Investors typically look for high-quality stocks with strong balance sheets and strong cash flows during market turmoil,” said Eric Sterner, chief investment officer at Apollon Wealth. “Megatechs have recently become part of that defensive play.”
That’s the hope many stock investors are pinning that the mega-cap tech companies’ exposure to the broader market and their relative safety will limit any weakness in the stock market.The Magnificent Seven has more than 30% weighting in the S&P 500.
Meanwhile, the Fed is cutting rates, although the pace will likely be slower than expected. That makes this a very different situation than 2022, when the Fed was rapidly raising rates and the indexes were falling. were.
Still, many Wall Street experts are urging investors to tread carefully for now, as interest rate risk strikes in a variety of unexpected ways.
“The companies in the S&P 500 that are up the most are likely to be the most vulnerable, and that could include the Mag Seven, and some of the mid-cap and small-cap growth bubble areas are likely to be under pressure,” Janus said. Henderson: Peron. “We have been consistent in our company, staying focused on quality and being sensitive to evaluation. That will be very important in the coming months.”
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