Rising Treasuries could push the S&P 500 to 6,200 – UBS

[Wall Street sign, New York City, USA]
mbbirdy/E+ via Getty Images

U.S. equities (SP500 [https://seekingalpha.com/symbol/SP500]) could rally to around 6200 points if the 10-year Treasury yield (US10Y [https://seekingalpha.com/symbol/US10Y]) reaches 5%, according to Gerry Fowler, chief of European Equity Strategy and head of Global Derivatives Strategy at UBS.

“We see the S&P 500 (SP500 [https://seekingalpha.com/symbol/SP500]) trading up to 6,200 on moderate (mid-teen) realized volatility,” Fowler said, noting this would represent a significant upside from current levels despite the seemingly counterintuitive relationship between higher yields and equity performance.

The 10-year U.S. Treasury yield (US10Y [https://seekingalpha.com/symbol/US10Y]) serves as a proxy for the global risk-free rate and is widely used in discounted cash flow modeling, making its movements crucial for equity valuations.

“The UST yield is not an island,” he said, and added that yield changes are “almost always coincident with changes in the other components of equity returns, including risk premia and cash flow forecasts.”

Term premia risks represent a particular concern for investors, as they could drive yields higher without the usual offsetting positive effects on growth expectations.

“The sharp rise in term premia in recent years is a special case of UST yields moving without much effect or correlation with other components of the discount rate,” Fowler added.

He identified several factors driving this dynamic, including “uncertainty, deficits, debt burdens, and potential disincentives for U.S. inbound portfolio flows.”

A more optimistic scenario envisions 5% yields resulting from continued economic resilience, with tariff revenue supporting fiscal stimulus and budget proposals successfully incentivizing investment.

“We assume that 5% yields come from a rise of around 32 basis points in 10-year real yields and a 15 basis points rise in 10-year inflation expectations,” Fowler said. This growth-oriented outlook could lift both yields and profit expectations simultaneously, creating a more favorable environment for equities despite higher rates.

Sector performance would likely diverge significantly in such a scenario, with cyclicals outperforming defensive stocks.

“Our models show potential for outperformance from airlines (AIRL [https://seekingalpha.com/symbol/AIRL]), (JETS [https://seekingalpha.com/symbol/JETS]), mining (XME [https://seekingalpha.com/symbol/XME]), (PICK [https://seekingalpha.com/symbol/PICK]), (ICOP [https://seekingalpha.com/symbol/ICOP]), and consumer discretionary stocks (XLY [https://seekingalpha.com/symbol/XLY]), while defensives like consumer staples (XLP [https://seekingalpha.com/symbol/XLP]) and health care (XLV [https://seekingalpha.com/symbol/XLV]) stagnate,” Fowler said, and added that gold miners (GDX [https://seekingalpha.com/symbol/GDX]), (GDXJ [https://seekingalpha.com/symbol/GDXJ]) could be “flat to down on this growth-oriented outlook.”

More U.S. government bond ETFs: (GOVI [https://seekingalpha.com/symbol/GOVI]), (SPTL [https://seekingalpha.com/symbol/SPTL]), (TIP [https://seekingalpha.com/symbol/TIP]), (SPTI [https://seekingalpha.com/symbol/SPTI]), (BIL [https://seekingalpha.com/symbol/BIL])

Investors can track other bond ETFs here [https://seekingalpha.com/etfs-and-funds/etf-tables/bonds].

MORE ON UNITED STATES 10-YEAR BOND YIELD:

* Macro Insights From May 2025: Tariff Relief, Bull Trap Warnings, And Rising Debt Concerns [https://seekingalpha.com/article/4791702-macro-insights-from-may-2025-tariff-relief-bull-trap-warnings-and-rising-debt-concerns]
* Weekly Market Pulse: Time Out [https://seekingalpha.com/article/4791613-weekly-market-pulse-time-out]
* Wall Street Lunch: Court Halts Tariff Agenda - Trump's Next Move? [https://seekingalpha.com/article/4790845-wall-street-lunch-court-halts-trumps-tariff-agenda]
* Wall Street takes home gains, Nasdaq adds nearly 1% while S&P approaches 6,000 [https://seekingalpha.com/news/4455095-stock-market-news-today-nasdaq-sp500-dow-jones]
* Market Voices: OECD sees lower GDP growth ahead, Dollar General shines [https://seekingalpha.com/news/4455106-market-voices-oecd-sees-lower-gdp-growth-ahead-dollar-general-shines]