Société Générale: A 10-year US Treasury yield of 5.5% will become a critical pressure point for the stock market

Alain Bokobza, Global Head of Asset Allocation at Société Générale, stated that a 5.5% yield on the 10-year US Treasury is a critical point; higher borrowing costs will exceed profit growth and begin to put pressure on stock valuations. Bokobza pointed out that this year’s significant global earnings upgrades have meant that even as yields rise, equity risk premiums have not collapsed. He said: “Currently, equities are not more expensive than at the beginning of the year, but a 5.5% yield level will be the critical point where upward earnings revisions are no longer enough to support valuations — that is, the threshold at which stocks begin to take a hit. The upcoming rate hikes from the Federal Reserve and the European Central Bank are expected to be moderate and are unlikely to be aggressive enough to disrupt the current economic cycle or calm inflation concerns.” Last week, Grace Peters of JPMorgan said that a 5% yield on the 10-year US Treasury would have significant psychological implications and could trigger a stress reaction in the stock market. Emmanuel Cau of Barclays similarly believes that a rise to 5% will make investors more concerned about the impact on equities.