Stock Market Rally Faces Threat from Surging Treasury Yields, Goldman Sachs Warns

Further upside for equities will be difficult without relief from the bond market, according to Goldman Sachs, as the benchmark U.S. 10-year Treasury yield climbs to levels not seen in nearly two decades.

Yields Hit Multi-Decade Highs

In a note to investors, Goldman Sachs analyst Christian Mueller-Glissmann highlighted that the 10-year Treasury yield has reached 5.25%, its highest point since July 2007. The bank noted that the pressure is global, with European bonds faring even worse amid energy and fiscal policy concerns, while Brent crude oil remains near $100 a barrel.

This sharp rise in real rates, combined with a stronger U.S. dollar and widening credit spreads, has weighed on market sentiment. According to the note, Goldman's proprietary risk appetite indicator has declined since the summer, reflecting the more challenging macroeconomic environment.

A Divided Market Performance

Despite the surge in interest rate volatility, equity volatility has remained relatively low. However, performance has been narrowly focused, with large-cap, technology-heavy indexes like the Nasdaq outperforming, buoyed by enthusiasm for artificial intelligence. Goldman Sachs characterized the overall market breadth as poor.

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Conversely, the most rate-sensitive sectors of the market have experienced the largest declines. These areas include:

• Homebuilders
• Gold miners
• Real estate
• Utilities
• The small-cap Russell 2000 index

Goldman's Outlook and Strategy

"The clearest path to equity upside from here remains rates relief," Mueller-Glissmann wrote, summarizing the bank's position. Goldman Sachs remains neutral on risk over a three-month horizon but is modestly positive over 12 months, maintaining an overweight position in equities and an underweight in credit.

Reflecting the pressure from higher real rates, the bank also lowered its 2026 price target for gold to $4,650 per ounce. For investors looking to position for a potential drop in yields, Goldman suggested exploring call options on rate-sensitive stocks.