Despite Rising Bond Yields, Goldman Still Sees 10% Upside for the S&P 500

Goldman Sachs is maintaining its optimistic outlook for the S&P 500, sticking to its 12-month price target of 6,500, even as bond yields continue to climb. In a recent note to clients, the firm’s strategists, led by David Kostin, addressed concerns about how rising U.S. Treasury yields might affect the equity market and reaffirmed their stance that stocks can still perform well under current conditions.

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The recent surge in yields, particularly on the 10-year U.S. Treasury note, has caught investors’ attention. After hovering around 4% at the end of April, the yield has since risen to approximately 4.43%. This uptick was largely fueled by renewed concerns over inflation—especially given the impact of newly proposed tariffs—as well as a rise in term premia, which refers to the higher returns investors require to hold longer-dated government debt.

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Despite these developments, Goldman Sachs is forecasting only a moderate rise in yields going forward. The firm projects that the 10-year Treasury yield will end the year around 4.5%, with a slight increase to about 4.55% in 2026. These levels, while elevated compared to previous years, are not seen as inherently harmful to equities, as long as the increase is driven by the right factors.

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According to Kostin and his team, the effect of interest rate changes on stock prices depends more on the reasons behind those changes and the pace at which they occur, rather than the specific level of the rates themselves. In other words, if yields are rising because of improving economic growth and stronger earnings prospects, the stock market can generally absorb those increases without major disruptions.

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However, if the upward movement in yields is driven by inflation fears or worries over government borrowing and fiscal discipline, then equities are more likely to come under pressure.

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Another key point highlighted by Goldman’s strategists is the importance of gradual change. Equities tend to be more resilient when bond yields climb slowly. On the other hand, if yields rise abruptly—say, by two standard deviations in just one month—that can be enough to spark a market correction, as the adjustment creates instability and forces investors to reprice risk rapidly.

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Kostin noted that since the U.S. trade policy dispute intensified on April 2, there has been heightened interest among investors in the relationship between bond yields and stock performance. While the correlation between the two isn’t straightforward or always consistent, it remains a focal point for market participants trying to gauge how macroeconomic factors might influence asset prices.

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In terms of valuation, Goldman Sachs believes that the S&P 500 is currently trading near its fair value. Their model suggests that the index’s 12-month forward price-to-earnings ratio is unlikely to change significantly over the next year. One reason for this stability is that many of the index’s constituent companies have solid financial structures, including fixed-rate debt with longer maturities, which helps insulate them from short-term movements in interest rates.

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However, not all parts of the market share this resilience. Goldman points out that small-cap stocks are more exposed to rising interest rates because they typically carry more floating-rate debt with shorter maturities.

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This makes them more sensitive to fluctuations in the bond market and could lead to greater volatility for these types of companies if yields continue to rise or if borrowing costs climb sharply.

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Given this dynamic, Goldman is reiterating its recommendation for investors to prioritize companies with strong balance sheets. Firms that are less reliant on debt or that have fixed borrowing costs are better positioned to weather interest rate volatility. These financially stable companies are also more likely to maintain profitability and steady cash flows, making them more attractive in an uncertain macroeconomic environment.

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In summary, Goldman Sachs is not overly concerned about the current rise in Treasury yields, as long as the increases remain moderate and are tied to solid economic fundamentals. The firm continues to see value in U.S. equities and expects the S&P 500 to reach 6,500 over the next 12 months.

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Still, investors should remain cautious about sectors more vulnerable to rate changes, such as small caps, and focus on companies with robust financials to help manage potential risks.

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