(Bloomberg) — For years, it seemed like nothing could stop the stock market’s inexorable ride, with the S&P 500 index rising more than 50 percent from early 2023 to the end of 2024, adding $18 trillion in value along the way. But now Wall Street is looking at what could derail this rally: Treasury yields above 5 percent.
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For months, stock traders have shunned the bond market for months, focusing on President-elect Donald Trump’s promised tax cuts and the seemingly limitless possibilities of artificial intelligence. But last week, the risk came into focus as Treasury yields climbed to their worrisome levels and stock prices fell in response.
20-year U.S. Treasuries breached 5% on Wednesday and jumped higher on Friday, hitting their highest since Nov. 2, 2023. , 2023. Those yields have increased by about 100 percent since mid-September, when the Federal Reserve began tapering interest rates. At the same time, it dropped 100 basis points.
Jeff Blazek, co-CIO of multi-asset strategies at Neuberger Berman, said of the dramatic and rapid jump in bond yields during the first months of an easy cycle is “unusual.” Over the past 30 years, intermediate and long-term yields have been relatively flat or slightly higher in the months after the Fed began a series of rate cuts, he added.
Traders are eyeing the policy-focused 10-year Treasury yield, which is the highest since October 2023 and is fast approaching 5%, a level they fear could trigger a stock market correction. It briefly passed the deadline in October 2023, and you have to go back to July 2007 before then.
“If the 10-year hits 5%, he’s on his knees to sell stocks,” says Matt Perron, global head of solutions at Janus Henderson. “Such episodes take weeks or maybe even months to play out, and in the process the S&P 500 could drop as much as 10%.”
The reason is quite simple. Rising bond yields make Treasuries more attractive, while also increasing the cost of raising capital for companies.
The move to the stock market was evident on Friday, as the S&P 500 fell 1.5% on its worst day since mid-December, turned negative for 2025, and came close to erasing all of its November gains from Trump’s election euphoria.
While there’s no magic to fixating on 5% of round-number psychology, perceived hurdles “can create technical hurdles,” said Christie Akulian, head of iShares investment strategy at BlackRock. Meaning, rapid product movement makes it difficult to raise stocks.
Investors are already seeing how. The yield for the S&P 500 sits below 1 percent on 10-year Treasuries, a trend that ended in 2002. This is good for a long time.
Mike Reynolds, vice president of investment strategy at Glenmede Trust, said: “Once yields rise, it becomes harder and harder to balance valuation levels.” “And if income growth starts to decline, there could be problems.”
Not surprisingly, strategists and portfolio managers are predicting a tough road ahead for stocks. Morgan Stanley’s Mike Wilson expects a tough six months for stocks, while Citigroup’s wealth division says there is an opportunity for clients to buy into bonds.
The path to 5% on the 10-year Treasury became more realistic on Friday after strong jobs data led economists to cut expectations for rate cuts this year. But this is not just about the feds. The sell-off in bonds is global and based on extreme uncertainty presented by tight inflation, hawkish central banks, sovereign debt and the incoming Trump administration.
“When you’re in hostile waters, yields above 5% are where all bets are off,” says Mark Malek, chief investment officer at Sibert.
What equity investors need to know now is when and if serious buyers will step in.
“The real question is where do we go from there,” said Rick de los Reyes, portfolio manager at T Rowe Price. “If it’s 5% going to 6%, that’s going to worry people, if it’s 5% before it stabilizes and eventually goes down, things will be fine.”
The key is not so much that products are increasing, but why, market experts say. As the U.S. economy improves, a slower increase could help stocks. But a quick jump in inflation, the federal deficit, and policy uncertainty is a red flag.
In recent years, stocks have sold off as products have risen rapidly. The difference this time seems to be complacent investors, as seen in the bullish position of bullish valuations and uncertainty about Trump’s policies. And that’s putting stocks in a vulnerable position.
Eric Deaton, president of the Wealth Alliance, said: “When you look at rising prices, a strong labor market and an overall strong economy, all of this points to the possibility of improving inflation.” And that doesn’t include Trump’s policies.
One area that could be a haven for equity investors is the group that has been making the most of the gains in recent 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. – They are still posting rapid revenue growth and high cash flow. Furthermore, looking ahead, they are expected to be the biggest beneficiaries of the artificial intelligence revolution.
“Investors typically look for high-quality stocks with strong balance sheets and strong cash flows during periods of market volatility,” said Eric Sterner, chief investment officer of Apollo Wealth. “The megatechs have recently become part of that defense game.”
That’s the hope many equity investors are hanging on to, with the megacap tech companies’ moves in the broader market and their relative safety limiting any weakness in the stock market. The Magnificent Seven have more than 30% weighting in the S&P 500.
At the same time, the Fed is in the middle of reducing interest rates, although the pace may be slower than expected. This makes the situation different from 2022, when the Fed hikes quickly and indexes fall.
Still, many Wall Street experts urge investors to proceed with caution as price risk comes in a variety of unexpected ways.
“Companies in the S&P 500 could be very vulnerable — and that could include the Mag Seven — and some of the bubble areas in mid-cap and small-cap growth could be under pressure,” said Janus Henderson. At Perron, we have come up with a focus on quality and a sense of value in our company. It will be very important in the coming months.
