Goldman Sachs believes the clearest path to further gains in U.S. stocks would be a pullback in bond yields.
The bank highlighted the sharp rise in the U.S. 10-year Treasury yield, which has climbed to its highest level in nearly two decades.
Analyst Christian Mueller-Glissmann noted that the 10-year yield reached 5.25%, its highest level since July 2007.
European Bonds Face Additional Pressure
Bond markets in Europe have also come under pressure.
Energy concerns and fiscal uncertainty have pushed yields higher, while Brent crude remains close to $100 per barrel.
Oil prices have stayed elevated after the United States rejected Iran’s proposal for a seven-day ceasefire.
Higher energy prices can add to inflation concerns, making it more difficult for central banks to ease monetary policy.
Goldman Risk Appetite Indicator Weakens
Goldman Sachs said its risk appetite indicator has declined since the summer, although it was unchanged last week.
A stronger U.S. dollar and slightly wider credit spreads have weighed on investor sentiment.
The rise in real interest rates has added further pressure.
Interestingly, equity volatility has remained relatively low even as volatility in bond markets has increased sharply.
Nasdaq and Large-Cap Stocks Continue to Outperform
Large-cap stocks and technology-heavy indexes, including the Nasdaq, have continued to perform better than many other parts of the market.
Momentum stocks have also remained strong, helped by continued enthusiasm around artificial intelligence.
However, Goldman Sachs warned that market breadth remains weak.
This means gains are being driven by a relatively narrow group of stocks rather than broad participation across the market.
Rate-Sensitive Stocks Take the Biggest Hit
The parts of the stock market most exposed to interest rates have suffered the largest declines.
These include homebuilders, real estate companies, utilities, gold miners and small-cap stocks in the Russell 2000.
Higher borrowing costs tend to weigh more heavily on these sectors because their valuations and business models are often more sensitive to changes in interest rates.
Higher Real Rates Also Weigh on Gold
Gold has also struggled with rising real yields.
Goldman Sachs said higher real interest rates have temporarily outweighed support from central bank gold purchases.
The bank lowered its 2026 gold price target to $4,650 per ounce.
Goldman Remains Cautiously Positive on Equities
Goldman Sachs maintains a neutral view on risk assets over the next three months.
However, the bank is modestly positive over a 12-month horizon.
It remains overweight equities while maintaining an underweight position in credit.
Mueller-Glissmann said lower interest rates remain the clearest catalyst for additional stock market gains.
Goldman also suggested that call options on rate-sensitive stocks could benefit if Treasury yields begin to fall.
For investors, the direction of bond yields may therefore remain one of the most important factors determining whether the equity rally can continue.
