The bond market's recent turmoil over tariffs and a growing deficit has rattled many stock investors. However, Goldman Sachs analysts suggest that the S&P 500 could still climb higher in 2025, offering a nuanced perspective on the interplay between bond yields and equity markets.
Goldman points to rising concerns in the US Treasury market, where yields spiked amid trader unease about the swelling federal budget deficit and the potential economic drag from tariffs. The 10-year Treasury yield—a barometer of long-term interest rate expectations—surpassed 4.5% in late May before retreating slightly to 4.4%.
Yet, history suggests that these moves in bond yields may not directly correlate with stock market performance. Since 1940, during periods when the 10-year yield ranged between 4% and 5%, the S&P 500 has delivered a median annual return of 11%. Interestingly, stocks have performed well in years when yields were either higher or lower, leading Goldman analysts to conclude that the relationship between bond yields and stock returns is not straightforward.
"The drivers and pace of bond yield changes hold greater significance for equities than the specific yield levels," analysts noted in a client report.
Goldman acknowledges that current bond yields around 4.5% could act as a ceiling for the S&P 500’s valuation growth. Historically, equities have faced headwinds when bond yields spike more than two standard deviations in a single month. Such a move today would imply the 10-year yield jumping to 4.9%, a threshold that could dampen stock market momentum.
Looking ahead, Goldman forecasts the 10-year yield to remain near its current levels through the rest of 2025. Their outlook hinges on expectations of "below-trend" economic growth coupled with "above-target" inflation. This environment presents a dilemma for the Federal Reserve: slower growth might argue for rate cuts to stimulate the economy, while persistent inflation supports maintaining steady rates to curb price pressures. As a result, monetary policy could remain in a holding pattern.
Despite these macroeconomic challenges, the S&P 500 may still find room to grow. Much of the equity market’s resilience stems from factors other than bond yields, such as corporate earnings growth, sectoral rotations, and broader investor sentiment.
Still, the volatility in the bond market has raised questions. Some experts speculate that "bond vigilantes"—market participants who sell off bonds to signal disapproval of fiscal policies—may be exerting influence, pushing yields higher. This phenomenon, while historically rare, can shake confidence in US debt securities as a safe haven.
For wealth advisors and RIAs, navigating this complex environment requires balancing portfolios with an eye on both fixed income and equities. Fixed-income allocations may need to shift toward shorter-duration bonds to mitigate the risks of yield spikes, while equity strategies could focus on sectors better positioned to weather inflationary pressures or slower growth.
Ultimately, while the bond market’s movements will continue to capture headlines, the S&P 500’s trajectory in 2025 may hinge more on earnings growth, sector dynamics, and investor confidence than on the specific level of Treasury yields. By staying attuned to these broader market drivers, advisors can help their clients navigate a year poised for both challenges and opportunities.
