U.S. stocks may face greater downward pressure, analysts say the S&P 500 index could drop 15%

U.S. Treasury yields have risen rapidly, which may indicate further declines in the stock market.

According to the Zhitong Finance APP, the yield on the 10-year U.S. Treasury bond is nearing 4.8%, up 1.2 percentage points from last September's low. The employment report released on Friday for December showed that U.S. job growth exceeded expectations, with multiple sectors experiencing growth, which pushed yields higher. This data, combined with recently released inflation figures that were above expectations, makes it less likely that the Federal Reserve will cut interest rates in the short term.

Currently, the 10-year Treasury yield could rise to concerning levels. The yield has surpassed last year's key level of 4.7%, which attracted significant buying at that time, driving bond prices up and yields down. However, these buyers have not appeared this year, leading to intensified bond sell-offs, and yields could rise to 5%.

Even if the 10-year yield does not stay at 5% for long, the signal remains clear: yields may remain elevated for some time, and levels below 4% may have become a thing of the past.

This poses a significant problem for the stock market. Although the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all fell on Friday, the impact of rising yields has become increasingly pronounced.

Sometimes, rising yields coexist with a rising stock market, as the increase in yields may reflect stronger economic demand and corporate profit growth. However, the recent situation is different. The S&P 500 has risen 22% over the past year, and current market valuations already reflect expectations for profit growth. Further increases in yields could suppress economic growth, as higher yields encourage consumers to reduce spending and increase savings.

This shift has led to a negative correlation between rising yields and falling stock prices over the past month. A research report from Morgan Stanley indicates that if the 10-year yield rises further, the stock market may face larger declines.

The valuation of the S&P 500 can help assess potential downside risk. Currently, the index's price-to-earnings ratio is about 21.2 times, higher than the 18 times it would reach if the 10-year yield hits 5% by the end of 2023. If the price-to-earnings ratio falls to 18 times, the S&P 500 could drop to 4,930 points, a 15% decline from current levels. While it may not necessarily fall that much, the outlook is not optimistic.

Of course, yields may stop around 5%, similar to the situation in 2023. Current inflation remains below 3%, and a 5% yield offers attractive real returns. If yields show a clear downward trend, the stock market may stabilize.

The S&P 500 may find support around 5,400 points, a level that attracted significant buying in the summer, representing a 7% decline from current levels. John Kolovos, Chief Technical Strategist at Macro Risk Advisors, believes that the key support level is around 5,500 points