LIVE MARKETS-US stocks to see 10% upside despite elevated Treasury yields - Goldman Sachs

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US STOCKS TO SEE 10% UPSIDE DESPITE ELEVATED TREASURY YIELDS - GOLDMAN SACHS

Goldman Sachs expects the S&P 500 .SPX to rise by 10% in the coming 12 months, despite elevated Treasury yields, analysts including David Kostin said in a note sent late on Friday.

Longer-dated Treasury yields have remained relatively high as the Federal Reserve keeps interest rates on hold on concerns about inflation, while pessimism about the U.S. fiscal trajectory weighs on longer-dated debt.

The benchmark 10-year Treasury yield US10YT=RR is at 4.45% on Monday, and Goldman notes that term premium is the highest since 2014. The bank expects the yield to end the year at 4.5% and edge higher to 4.55% in 2026.

While yields at current levels will constrain the magnitude of potential S&P 500 valuation expansion, the stock market is fairly valued due to strong corporate fundamentals, the bank said.

A 100 bp change in real Treasury yields is associated with a roughly 7% change in S&P 500 forward P/E, the bank estimates, and it expects the P/E multiple will be roughly unchanged over the coming year.

The analysts note that “the drivers and speed of changes in bond yields matter more for equities than a specific level of rates.” Equities typically gain when yields rise on expectations for economic growth, but struggle when yields increase on other drivers including fiscal concerns, they said.

Stocks have historically struggled when bond yields have risen by more than two standard deviations in a month, which is around 60 basis points today. However, "there is no clear relationship between the level of bond yields and equity returns."

The bank sees the S&P 500 .SPX rising to 6,500, or roughly 10% above the current level of 5,907, over the coming year, but recommends investors avoid stocks with weak balance sheets.

(Karen Brettell)

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