The Biggest Challenge to This Bull Market is Rising Treasury Yields. Here Are the ‘Trigger Levels’ to Watch

Investors eagerly anticipating a Santa Rally have found themselves let down so far. As the markets opened on Monday, Wall Street continued to face challenges following a 1.1% decline in the S&P 500 at the close of last week.

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A key factor fueling this caution is the rise in bond yields. On Friday, the benchmark 10-year Treasury yield reached its highest level in seven months, climbing nearly a full percentage point since September. This surge comes even as the Federal Reserve has eased its benchmark interest rate. Concerns about inflation, potentially aggravated by President-elect Donald Trump’s proposed tariffs and tax cuts, along with a growing government deficit increasing the supply of bonds, have exerted downward pressure on bond prices.

These developments could remain a challenge for equities in the months ahead, according to Julian Emanuel and his team of strategists at Evercore ISI. In a note published Sunday, Emanuel observed, “Long term, earnings drive stocks; however, there are times when rising long-term yields can exert medium-term pressure on equities even as the backdrop remains favorable.”

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Emanuel highlighted that rising bond yields pose the most significant challenge to the ongoing bull market as 2025 begins. He pointed to the latest surge in the 10-year yield, which contributed to heightened volatility in the equity market following the Federal Open Market Committee meeting on December 18.

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While Emanuel noted that several factors could lead to a temporary pullback in benchmark yields—such as traders unwinding elevated short positions on Treasuries or a potential easing of geopolitical tensions that might reduce inflationary pressures—he believes that the medium-term outlook is less optimistic. Factors like Trump’s policies, fiscal deficit concerns, and potentially reduced Treasury purchases by major foreign buyers such as China and Japan are likely to keep upward pressure on yields. As a result, both bond and equity market volatility are expected to persist into the new year.

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Importantly, Emanuel cautioned that yield pressures do not discriminate based on stock valuations, noting that such pressures have historically occurred both when valuations were extended, as in 2022, and when they were not, such as in 2018. He added that there is no consistent yield threshold over the decades that has triggered stock market corrections. In previous cycles, these so-called trigger levels have varied, ranging from 3% in 2018 to as high as 6% in 1994.

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For the current cycle, Emanuel believes that a 10-year Treasury yield of 4.5%, which was already surpassed early Monday, is a level the stock market can manage. However, if the yield rises above 4.75%, he anticipates a longer and more pronounced correction in equity markets.

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Emanuel also highlighted the market’s performance since the bond bull market ended in 2020. Over 1,754 days, stocks have gained a cumulative 117%. However, during the 89 days in which the 10-year yield has exceeded 4.5%, stocks are down 2.1%. On the 20 days when yields have surpassed 4.75%, stocks have declined by 3.7%. He warned that a yield of 5% could pose a significant threat to the current bull market, akin to the impact of the 3% yield threshold in 2018 during Trump’s first term.

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Despite these challenges, Emanuel and his team remain optimistic about the broader market trajectory. They forecast that after a volatile start to 2025, the S&P 500 could climb to 6,800 by year-end. This suggests they believe the upper yield limits are unlikely to be sustained or breached over the long term.

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As for current market movements, U.S. stock indices—including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite—opened sharply lower, even though benchmark Treasury yields dipped slightly. Meanwhile, the dollar index gained ground, oil prices edged higher, and gold traded around $2,612 per ounce.

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Overall, the start of 2025 presents a mixed picture for investors. While rising bond yields and their potential to dampen equity markets remain key concerns, the long-term outlook for stocks appears promising, provided yields stabilize below critical levels.

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