Recently, the U.S. 10-Year Treasury Notes Yield has risen significantly, causing concerns in the market about the outlook for Stocks.

The "Christmas rally" that investors were expecting did not materialize, and after the S&P 500 Large Cap fell by 1.1% last Friday, U.S. Stocks continued to decline on Monday.

Analysts pointed out that the rise in Bonds yields is one of the main reasons for the cautious sentiment in the market. Although the Federal Reserve has cut interest rates, the yield on 10-Year U.S. Treasuries has risen nearly one percentage point since September, reaching a seven-month high last Friday. This change has raised concerns about the future trends of the stock market.

In addition, there are concerns in the market that the new President Trump's tariff and tax reduction policies may exacerbate inflationary pressures, coupled with increasing government deficits that could lead to a rise in Bonds supply, further depressing Bonds prices.

The Evercore ISI strategy team led by Julian Emanuel stated last Sunday:

"In the long term, corporate earnings remain the main driver of the stock market, but even if the overall environment remains favorable, rising long-term yields may exert mid-term pressure on the stock market. After entering 2025, the rise in Bonds yields will become the biggest challenge facing the U.S. stock market bull run."

There may be a pullback in the short term, but mid-term risks still exist.

Emanuel believes that benchmark yields may experience a pullback in the short term due to high short positions in the Treasury market, which could lead to a covering action. At the same time, geopolitical tensions in oil-sensitive regions may ease, thereby reducing inflation concerns. However, Trump's policies, fiscal deficit issues, and expectations that Japan may reduce purchases of U.S. Treasury securities will continue to push bond yields higher in the medium term, so he anticipates that rising volatility in the bond and stock markets at the beginning of next year is the baseline scenario.

He further pointed out that the pressure from rising bond yields on the stock market is constant, regardless of whether stock market valuations are too high. Emanuel illustrated that whether in 2018 (when stock market valuations were relatively low), or in 1994 and 2022 (when stock market valuations were high), the rise in bond yields exerted pressure on the stock market.

Emanuel emphasized that over the past few decades, the 10-Year U.S. Treasury yield has not had a fixed "threshold" that leads to stock market pullbacks once a certain level is exceeded. During different periods, this "trigger level" can vary significantly. For instance, the 3% yield in 2018 put pressure on the stock market, while in 1994, this level was as high as 6%.

In the current cycle, Emanuel believes that if the 10-Year Treasury yield remains below 4.5%, the stock market will still be capable of overcoming the pressure and continuing to rise. However, if the yield breaks above 4.75%, it could trigger a longer-term and deeper adjustment in the stock market.

Emanuel observed that since the end of the bond bull market in 2020, the stock market has cumulatively risen by 117% over 1,754 days. However, during the 89 days when the 10-Year Treasury yield exceeded 4.5%, the stock market fell by 2.1%. Furthermore, during the 20 days when the yield reached or exceeded 4.75%, the stock market fell by 3.7%. He also warned that if the 10-Year Treasury yield surpasses 5%, it could pose a greater threat to the bull market, similar to the 3% yield level during year two of Trump's presidency in 2018.

Despite the pressure from rising bond yields, Emanuel and his team remain optimistic about the stock market outlook in the late period of 2025. They expect that although volatility may occur at the beginning of next year, after short-term adjustments, the S&P 500 Index is expected to reach 6,800 points by 2025. They believe that the probability of yields breaking through high threshold levels is low, therefore maintaining a positive attitude towards the long-term trend of the stock market.