The market is nearing a crucial turning point that could crush stocks

  • Societe Generale warns that if 10-year Treasury yields climb above 2.5%, that could result in a US equity sell off.
  • US stocks are close to the most expensive on record, and their position of strength is getting increasingly tenuous.

While many stock bulls have focused for months on positive corporate fundamentals — most notably earnings growth — equities have also benefited from how appealing they look compared to other assets.

Treasury notes issued by the US government are yielding roughly 2.36% right now. And while that’s more than a multi-month low of 2.04% reached in September, it’s still down from highs reached earlier in 2017.

If the yield for the 10-year benchmark note climbs above the crucial threshold of 2.5%, that could start working against US stocks that are already close to the most expensive since the dotcom bubble, according to strategists at Societe Generale.

If Treasurys reach that level, that would imply 7% downside for US equities, while an increase to 2.75% would translate to a possible 15% drop, SocGen data show.

Screen Shot 2017 11 20 at 9.16.28 AMSociete GeneraleHigher bond yields could spell trouble for US stocks.

“Richness in both absolute and relative valuations leaves little scope for any disappointment on earnings or upward drift in bond yields,” Alain Bokobza, the firm’s head of global asset allocation, wrote in a client note.

Bokobza compares the US stock market to a frog being boiled alive, in the sense that investors are so comfortable with conditions right now that they don’t notice overheating conditions bubbling up around them. While he doesn’t expect any sort of major market reckoning in the next 12 to 18 months, he does say that the S&P 500 is “showing an asymmetric risk/reward profile.”

That much may be true, but for the time being the market should be safe as long as 10-year Treasury yields don’t spike above 2.5% in the near future.

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