Stocks could drop 25% if 10-year yield hits 4.5%, Goldman says

If the 10-year U.S. Treasury yield hits 4.5% by year-end, the economy would probably muddle through — stocks, not so much, according to Goldman Sachs Group.

Goldman’s base-case scenario calls for a 10-year yield of 3.25% by the end of 2018, though a “stress test” out to 4.5% 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% by year-end would cause a 20% to 25% 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%, many strategists have said they felt equities could continue to rise until reaching 3.5% or 4%. The 10-year was trading around 2.86% as of 6 a.m. New York time Monday.https://www.investmentnews.com/wp-content/uploads/assets/graphics src=”/wp-content/uploads2018/02/CI114432226.PNG”

A 20% to 25% 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 to 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.

(More: Stocks tremble, but savers cheer rising rates)

Related Topics: Goldman Sachs & Co.