- Societe Generale says a 10-year Treasury yield above 2.5% could result in a US equity sell-off.
- US stocks are close to the most expensive on record, and their position of strength is increasingly tenuous.
While many stock bulls have for months focused on positive corporate fundamentals — most notably earnings growth — equities have also benefited from how appealing they look compared with other assets.
Treasury notes issued by the US government are yielding roughly 2.36%. And while that's above a multimonth low of 2.04% reached in September, it's still down from highs reached earlier this year.
If the yield for the 10-year benchmark note climbs above the crucial threshold of 2.5% that could start working against US stocks that are already close to the most expensive since the dot-com bubble, according to strategists at Societe Generale.
Treasurys reaching that level would imply 7% downside for US equities, while an increase to 2.75% could translate to a 15% drop, Societe Generale data shows.
"Richness in both absolute and relative valuations leaves little scope for any disappointment on earnings or upward drift in bond yields," Alain Bokobza, the firm's head of global asset allocation, wrote in a client note.
Bokobza compares the US stock market to a frog being boiled alive, in the sense that investors are so comfortable with conditions right now that they don't notice overheating conditions bubbling up around them.
While he doesn't expect any major market reckoning in the next 12 to 18 months, he says the S&P 500 is "showing an asymmetric risk/reward profile."
That much may be true — but for the time being, the market should be safe as long as 10-year Treasury yields don't spike above 2.5%.
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