Goldman Sachs equity strategists weighed in on the relationship between the Treasury yields and stock returns.
The S&P 500 historically experiences a 4% decline when Treasury yields rise by two standard deviations in a month, they noted.
“When yields stop rising, equities typically get some relief,” the analysts wrote in a note to clients.
The impact of increasing yields on stocks is contingent on the dynamic between expectations for economic growth, discount rates, and corporate balance sheets. The Russell 2000 is particularly responsive to changes in the growth outlook, while the Nasdaq 100 is more susceptible to changes in discount rates but carries lower levels of leverage.
Since August, investor attention has been focused on valuations and leverage, but recently, the spotlight has shifted to the growth outlook.
“We expect headwinds to valuations and balance sheets to persist but would view a substantial further downgrade to the growth outlook as a buying opportunity.”
“We therefore remain wary of long-duration and highly levered stocks but think investors should treat cyclical sell-offs as a buying opportunity,” the analysts added.