• Goldman Sachs (GS) says the clearest path to further equity gains is a decline in Treasury yields, with the 10-year note reaching 5.25%, its highest since 2007.
  • The firm remains overweight equities for the next 12 months, but warns that the bond market poses the main near-term risk to stocks.
  • Market breadth is weak, with rate-sensitive sectors such as homebuilders, real estate, utilities, and small caps underperforming.

Yields Threaten Equity Rally

Goldman Sachs’ trading desk has identified the “clear and present danger” of further upward movement in long-dated Treasury yields as the primary threat to the stock market’s record run. The 10-year Treasury yield recently climbed to roughly 5.25%—the highest level since 2007—before settling at 5.18% on September 24, according to the Federal Reserve’s daily constant-maturity series. That rapid ascent, from 4.96% on September 22 to 5.11% on September 23, has created a valuation and financing headwind for equities, even as strong earnings and the artificial intelligence capital-expenditure cycle continue to support large-cap names.

“What institutional investors like us are really focused on is regulatory stability,” said Andrea Valeri, Blackstone (BX)’s country chairman for Italy and chief investment officer for Blackstone Credit and Insurance’s private credit business in Europe and APAC, speaking at the Bloomberg Future of Finance conference in Milan. While Valeri’s comments addressed Italy’s investment climate, his emphasis on regulatory certainty underscores a broader market theme: investors are demanding clarity on policy and rates before committing capital at current valuations.

Goldman remains constructive on equities over a 12-month horizon, citing resilient corporate earnings and what it estimates could be a surge in hyperscaler capital spending from about $150 billion in 2023 to roughly $1.3 trillion next year. That AI-driven investment cycle is expected to support technology, data-center, semiconductor, and industrial supply chains. However, the firm cautions that earnings growth is likely to slow from an extraordinary 25%–30% pace to roughly 10%–12%, which may not justify outsized market gains without a corresponding drop in yields.

Rate-Sensitive Sectors Suffer

Beneath the calm surface of the major indices, market breadth has deteriorated. Rate-sensitive areas—including homebuilders, real estate, utilities, and smaller companies—have borne the brunt of the yield spike. Goldman notes that housing-related stocks have lagged the equal-weight S&P 500 by 16 percentage points since June. The 10-year yield’s rise pressures valuations by discounting future cash flows at a higher rate, particularly hurting “long-duration” businesses whose expected profits lie further in the future. Goldman estimates that roughly 75% of the present value of the S&P 500 reflects cash flows at least 10 years away, making long-term rates especially important.

Smaller firms are more exposed because they often rely on floating-rate debt or need to refinance, unlike large S&P 500 companies that generally have longer-maturity, fixed-rate debt and strong interest coverage. Higher mortgage rates also reduce housing affordability, suppressing turnover and weighing on homebuilder valuations. Utilities and real estate owners face pressure as their dividends and long-lived cash flows are valued against higher bond yields, while property refinancing becomes more expensive.

“We have a constant balance with the banks, which really we consider our partners and not only our binary competitors,” said Cecile Mayer-Levi, head of private debt activity at Tikehau Capital SCA (TKKHF). “It’s much more of a convergence between the two solutions.” Her comments, made at the same Milan conference, highlight how private credit funds are increasingly partnering with domestic banks to deploy capital—a trend that could accelerate if public market financing remains costly.

Fed Policy and Fiscal Pressures

The yield surge reflects overlapping forces: persistent inflation, including higher energy and refined-product prices tied to Middle East developments; resilient nominal economic growth, which reduces the likelihood of near-term Fed easing; large U.S. fiscal deficits and heavy Treasury issuance; and the massive AI investment cycle that stimulates growth but also adds to demand for capital, labor, equipment, electricity, and debt financing. Goldman economists forecast third-quarter U.S. GDP growth of 3.3%, while inflation has remained above target for 66 months. Markets have shifted from expecting rate cuts earlier in the year to pricing a meaningful likelihood of additional Federal Reserve hikes, with Goldman’s commentary noting that markets were then pricing about four further hikes.

The political context is primarily domestic fiscal and monetary policy. A sustained federal deficit at or near full employment can contribute to increased Treasury supply and a higher term premium—the extra return investors demand for holding longer-dated government debt. Fed policy must balance inflation control against the risk that high financing costs weaken housing, small businesses, commercial real estate, and employment. Higher U.S. yields can also attract capital into dollar assets, potentially tightening financial conditions globally. Countries and companies that borrow in dollars may face higher funding burdens; emerging markets can be particularly sensitive.

Goldman says equities have historically coped with rising rates unless the increase is unusually abrupt. At current conditions, it estimates a move of roughly 50 basis points in one month or 30 basis points in two weeks would exceed the historical “fast move” threshold. The pace of the recent rise—from 4.96% to 5.25% in a matter of days—has therefore raised alarms.

Outlook and Watchpoints

Near term, equity performance may hinge on whether the 10-year yield retreats from the 5.2% area, stabilizes, or resumes rising. A softer inflation or labor-market reading could ease yields and help rate-sensitive sectors rebound. Conversely, strong jobs data, sticky inflation, higher oil prices, or heavier-than-expected Treasury supply could push yields higher and widen market stress. Goldman’s constructive 12-month view rests on continued earnings growth, corporate resilience, and the AI investment cycle. But if yields remain elevated because inflation and fiscal concerns persist—not merely because growth is strong—equities could face multiple compression. The S&P 500 forward P/E has already fallen from 22x at the start of 2026 to 19x, while the earnings-yield versus real-10-year-yield gap is about 270 basis points.

A potential rotation is already visible: lower or more stable long-term yields would most directly benefit homebuilders, REITs, utilities, and small caps. If yields remain high but growth stays strong, leadership may continue favoring profitable large caps, financials, energy, and selected AI-related businesses. Goldman notes financial companies can benefit from higher rates, while AI and broader technology shares exhibit a modest negative correlation with real yields. The firm also sees Japanese equities—particularly a more domestic, TOPIX-like exposure—as an attractive alternative, supported by corporate-governance reform, AI and advanced-manufacturing exposure, defense-related demand, and pro-cyclical domestic policy.

Investors can earn a higher yield from relatively low-risk Treasuries, which raises the return required to justify holding equities—especially expensive growth shares. Retirees and savers benefit from improved income available from Treasuries, CDs, and other fixed-income products, though inflation determines the real benefit. The federal government and taxpayers face higher interest expense that can worsen fiscal tradeoffs over time, potentially affecting future taxes, spending, or borrowing needs.

Goldman Sachs is a global investment bank and asset manager. Its major businesses include investment banking, trading and market making, equities and fixed-income research, wealth management, asset management, lending, and transaction services. The research cited is largely associated with Goldman Sachs Research and market commentary from Tony Pasquariello, the firm’s global head of hedge-fund coverage across FICC and Equities. No leadership change or corporate restructuring is central to this development.

Representatives for Goldman Sachs did not immediately respond to a request for comment. Blackstone and Tikehau Capital declined to comment beyond their remarks at the conference.

Correction: An earlier version of this article misstated the 10-year Treasury yield on September 24. It was 5.18%, not 5.25%.