The bond market’s recent freakout over tariffs and the deficit has received a lot of attention from nervous stock investors, but one chart shows the S&P 500 can keep climbing higher in 2025, according to Goldman Sachs.
Analysts at the investment bank pointed to investor concern swirling around the US bond market, with Treasury yields spiking in recent weeks as traders fretted over the US’s yawning budget deficit and the impact of tariffs on the economy.
Those worries sent the 10-year US Treasury yield — a reflection of long-term interest rate expectations in the economy — past 4.5% in late May. The 10-year yield has since pulled back slightly to trade around 4.4%.
But historically, the 10-year US Treasury yield hasn’t had all that much of an impact on annual S&P 500 returns, the bank said.
Robert Shiller, Goldman Sachs Global Investment Research
Since 1940, when the 10-year yield hovered between 4% and 5%, the benchmark index saw a median gain of 11%. But stocks have gained more in years when the yield was both higher and lower, analysts said, concluding there was no clear relationship between bond yields and stock market returns.
“We believe that the drivers and speed of changes in bond yields matter more for equities than a specific level of rates,” analysts wrote in a client note last week.
Goldman still thinks that bond yields at current levels near 4.5% should “constrain the magnitude” of how much the S&P 500’s valuation can grow.
Historically, stocks have struggled to move higher once bond yields rise more than two standard deviations in a single month, which would be equivalent to the 10-year US Treasury yield spiking to 4.9% from its current levels, the analysts said.
Still, the bank expects the 10-year yield to hover around its current levels for the rest of 2025, pointing to expectations that the economy will still see “below-trend” growth and “above-target” inflation.
Lower growth can influence the Fed to cut interest rates to boost the economy, but higher prices influence the central bank to keep rates steady to control inflation, leaving monetary policy at a standstill.
The S&P 500 also looks like it’s trading close to fair value from a price-to-earnings perspective, Goldman said, suggesting the index could remain relatively flat for some time.
Still, investors have been wary of wild swings in the bond market lately, with some commentators speculating that bond vigilantes — traders who stage a sell-off in bonds to protest government policies — may be influencing yields higher.
Historically, these swings are unusual, and could be a sign that investors are growing more wary about purchasing US debt securities as a safe haven, investing experts told BI.
