(Bloomberg) -- If the 10-year U.S. Treasury yield hits 4.5 percent by year-end, the economy would probably muddle through -- stocks, not so much, according to Goldman Sachs Group Inc (NYSE:GS).
Goldman’s base-case scenario calls for a 10-year yield of 3.25 percent by the end of 2018, though a “stress test” out to 4.5 percent indicates such a move would cause stocks to tumble, economist Daan Struyven wrote in a note Saturday. He also said the economy would probably suffer a sharp slowdown but not a recession.
“A rise in rates to 4.5 percent by year-end would cause a 20 percent to 25 percent decline in equity prices,” the note said.
While a recent drop in stocks may have been fueled by concerns tied to the 10-year yield approaching 3 percent, many strategists have said they felt equities could continue to rise until reaching 3.5 percent or 4 percent. It’s trading around 2.86 percent as of 6 a.m. New York time Monday.
READ: Market’s Red Line for Yields Isn’t Where Most People Think
A 20 percent to 25 percent drop in stocks, as measured from the S&P 500’s Jan. 26 peak close of 2,872.87, would take the gauge to a range of approximately 2,155-2,298. It closed on Friday at 2,747.30 after dropping as low as 2,581 on Feb. 8 at the apex of the recent volatility-fueled meltdown. If this scenario did play out with Goldman’s numbers, stocks would have a long way further down to go.
(Updates with 10-year yield level in fourth paragraph.)
