How much longer can equities defy rising rates?

Investing.com -- Goldman Sachs told investors in a note that the clearest path to further stock gains is relief in the bond market, as the U.S. 10-year Treasury yield climbs to its highest level in nearly two decades.

The 10-year yield rose to 5.25%, the highest since July 2007, analyst Christian Mueller-Glissmann noted. European bonds fared worse amid energy and fiscal concerns. Brent crude remained near $100 a barrel after the U.S. rejected Iran's proposal for a seven-day ceasefire.

Goldman's risk appetite indicator has declined since the summer but was unchanged last week. Mueller-Glissmann explained that a stronger dollar and modestly wider credit spreads weighed on it, amplified by the sharp rise in real rates. Equity volatility has stayed relatively low even as volatility in rates has surged.

Large-cap stocks, tech-heavy indexes such as the Nasdaq and momentum stocks have outperformed, helped by AI. That has widened the gap between U.S. indexes, and Goldman said market breadth remains poor.

The most rate-sensitive parts of the market suffered the largest declines, the analyst acknowledged. These include homebuilders, gold miners, real estate, utilities and the Russell 2000.

He added that higher real rates have also temporarily outweighed gold's support from central bank buying. Goldman lowered its 2026 gold target to $4,650 an ounce.

The bank is neutral on risk over three months and modestly positive over 12 months, with an overweight in equities and an underweight in credit.

"The clearest path to equity upside from here remains rates relief," Mueller-Glissmann wrote. Goldman suggested call options on rate-sensitive stocks as a way to benefit if yields fall.

Original Article

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