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         A 100-basis-point change in real Treasury yields is associated with a roughly 7% change in S&P 500 forward price-to-earnings (P/E) multiple.



         How do higher interest rates affect US stocks?

         Several factors including a declining risk of recession, concerns about the path of US government debt, and higher borrowing costs around the world have contributed to an increase in US bond yields, according to Goldman Sachs Research.

         Rising interest rates have the potential to impact stocks in several ways, including limiting the scope of potential growth for stock valuations and reducing company earnings.

         The levels of bond yields themselves are not as important for stocks as the factors that are affecting interest rates. “Equities typically appreciate alongside rising bond yields when the market is raising its expectations for economic growth but struggle when yields rise due to other drivers, like fiscal concerns.”

         In fact, an analysis of weekly returns during the last few years shows that the market’s pricing of economic growth has been around three times more important than term premium (the additional risk of holding an asset with a later maturity) when it comes to stock prices. “This relationship was demonstrated in April and early May as improving growth expectations lifted both stocks and yields.”

         The speed of the move in bond yields also has an impact on stock prices. Stocks have historically struggled when yields rise by more than two standard deviations in a month. Today, a two-standard-deviation monthly move would be roughly 60 basis points, which would bring the nominal 10-year US Treasury yield to around 4.9% — similar to the levels in January this year.

         Goldman Sachs Research’s macro model suggests that a 100-basis-point change in real Treasury yields is associated with a roughly 7% change in S&P 500 forward price-to-earnings (P/E) multiple.