US 10-year yields seen higher at 2%, no difficulty for equity valuations – Goldman Sachs

In the view of the analysts at Goldman Sachs, the equity valuations are unlikely to face a hard time even though the US Treasury yields are projected higher at 2% in the coming months.

Key quotes

“Our economists expect that rates will continue to rise in coming months.”

“Their forecasts for an 11% pace of real US GDP growth in 2Q and core PCE inflation rising to 2.3% suggest that investors will have to continually grapple with the anxiety about economic overheating and Fed tightening that has gripped markets in recent weeks.”

“They expect the 10-year yield will rise to 1.8% by mid-year and 1.9% by year-end.” 

“Their expectation that the 10yr would rise to 2%.”

“We believe equity valuations should be able to digest 10-year yields of roughly 2% without much difficulty. A 10-year yield of 2% and a constant S&P 500 forward EPS yield of 4.5% (the inverse of a 22x P/E multiple) would reduce the yield gap between stocks and bonds to approximately its 45-year average of 250 bp.”