While there’s “no magic” to fixing 5% beyond the psychology of round numbers, perceived barriers can create “technical barriers,” said Kristy Akullian, head of investment strategy at iShares of Blackrock. In other words, a quick move in yields can make it difficult for stocks to move higher.

Investors are already seeing how. The S&P 500’s earnings yield is 1 percentage point below that of the 10-year Treasury, a performance last seen in 2002. In other words, the yield of owning an asset that is significantly less risky than the benchmark index of American shares has not been. this good in a long time.

“Once yields rise, it becomes increasingly difficult to rationalize valuation levels,” said Mike Reynolds, vice president of investment strategy at Glenmede Trust. “And if profit growth starts to falter, there could be trouble.”

Not surprisingly, strategists and portfolio managers are predicting a bumpy road ahead for stocks. Morgan Stanley’s Mike Wilson predicts a tough six months for stocks, while Citigroup’s wealth division told clients there is an opportunity to buy bonds.

The path to 5% on the 10-year Treasury became more realistic on Friday after strong jobs data led economists to scale back expectations for rate cuts this year. But this isn’t just about the Fed. The bond sell-off is global and based on sticky inflation, hawkish central banks, rising government debt and extreme uncertainties presented by the incoming Trump administration.

“When you’re in hostile waters, yields above 5% are where all bets are off,” said Mark Malek, chief investment officer at Siebert.

What equity investors need to know now is if and when serious buyers step in.

“The real question is where are we going,” said Rick de los Reyes, a portfolio manager at T. Rowe Price. “If it’s 5% on the way to 6%, that’s going to worry people, if it’s 5% before it stabilizes and eventually comes down, things will be fine.”

The key is not so much that yields are rising, but why, market professionals say. A slow rise as the US economy improves may help stocks. But a quick jump due to concerns about inflation, the federal deficit and political uncertainty is a red flag.

In recent years, whenever yields have risen rapidly, stocks have sold off. The difference this time seems to be complacent investors, as seen in the bullish stance on frothy valuations and uncertainties about Trump’s policies. And that’s putting the stock in a vulnerable position.

“When you look at rising prices, a strong labor market and a strong economy in general, everything points to a potential increase in inflation,” said Eric Diton, president of the Wealth Alliance. “And that doesn’t even include Trump’s policies.”

One area that may prove to be a haven for equity investors is the group that has been driving most of the gains in recent years: Big Tech. The so-called Magnificent Seven companies (Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc.) are still posting rapid growth in earnings and cash flows massive Moreover, looking to the future, they are expected to be the biggest beneficiaries of the artificial intelligence revolution.

“Investors tend to look for high-quality stocks with strong balance sheets and strong cash flows during market turbulence,” said Eric Sterner, chief investment officer at Apollon Wealth. “Mega technicians have become a part of this defensive game recently.”

That’s the hope many equity investors have, that mega-cap tech companies will dominate the broader market and their relative safety will limit any weakness in the stock market. The Magnificent Seven are weighted over 30% in the S&P 500.

At the same time, the Fed is in the midst of cutting interest rates, although the pace is likely to be slower than expected. That makes this a very different situation than in 2022, when the Fed was raising rates quickly and indexes were falling.

Still, many Wall Street professionals are urging investors to proceed with caution for now, as rate risk affects in a number of unexpected ways.

“Companies in the S&P 500 that are higher are likely to be the most vulnerable, and that could include the Mag Seven, and some frothy areas of mid-cap and small-cap growth are likely to be under pressure,” said Janus Henderson. peron “We’ve been consistent across our company in staying focused on quality and being sensitive to valuation. That’s going to be very important in the coming months.”

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