S&P 500 Could Drop 15% to 20%? Strategist Warns: Rising U.S. Treasury Yields Near 5% May Trigger Stock Market 'De-risking'

If long-term U.S. government bond yields continue to rise, market conditions could deteriorate rapidly. Phillip Colmar, Global Strategy Partner at market research firm MRB Partners, warns that if the 10-year U.S. Treasury yield keeps climbing, the S&P 500 index could fall as much as 15% to 20%.

According to a report by Business Insider, Colmar stated in a client note this week that rising long-term Treasury yields have brought the stock market to the brink of a 'de-risking' episode.

Last week, the 10-year Treasury yield briefly surpassed 4.7%, while the 30-year yield broke above 5.2%. Bond investors are increasingly concerned about rising government debt, strong economic growth expectations, and persistent inflationary pressures stemming from the U.S.-Iran conflict.

Colmar said on Friday (21st) that if long-term Treasury yields continue to rise and the 10-year yield approaches the 5% threshold, it could shock investors and trigger a 15% to 20% decline in the S&P 500.

Regarding the 10-year Treasury yield, he stated: 'As long as the market perceives that yields will keep rising and no force can stop it, a de-risking event could occur even before yields breach 5%.'

Colmar is not currently predicting the exact next move for U.S. Treasury yields, but he says his investment stance remains supportive of economic growth.

However, he notes that the U.S. Treasury Department's recent attempt this week to suppress long-term bond yields could backfire and push yields even higher.

U.S. Treasury Secretary Scott Bessent recently announced that the Treasury will expand its bond buyback program to reduce the supply of bonds in the market, aiming to further lower yields.

But Colmar believes this move may create the impression that the Trump administration is trying to suppress Treasury yields without addressing the root cause of rising yields—market concerns about inflation.

Colmar adds that because this measure was not coordinated with the Federal Reserve (Fed), it could signal to the market that the Treasury is panicking. The Fed has previously stated it wants to allow its holdings of government bonds to naturally roll off its balance sheet as they mature.

Colmar says, 'The market can easily detect policymakers' panic.'

Why Do Rising U.S. Treasury Yields Hurt the Stock Market?

The impact of rising long-term Treasury yields on the stock market stems from two main aspects.

First, higher yields typically pressure growth stocks. This is because investors compare the risk-free return offered by long-term government bonds with the uncertain long-term returns of the stock market.

Currently, a significant portion of market valuations is based on the long-term expectation that AI will boost productivity. If AI-related trading stalls, it could further drag down the broader market.

Second, rising government bond yields also affect the borrowing costs of AI companies. These firms are currently investing heavily in building AI infrastructure, and higher financing costs will compress the overall return on investment and reduce corporate profits.

Colmar notes that AI companies are currently under immense pressure to deliver returns on investment, and market expectations for their future profits are already extremely high. If borrowing costs continue to rise, the time required for companies to achieve the expected investment returns will be prolonged, prompting investors to revise earnings expectations downward and demand stricter capital expenditure controls, ultimately leading to falling stock prices.

He said: 'Ultimately, an expectation gap may form: AI itself might still be a solid theme, but market expectations are simply too high for companies to meet them anymore.'

For investors concerned about further rises in Treasury yields, Colmar also offers several strategies to strengthen their portfolios.

One approach is to reduce exposure to AI stocks while increasing allocations to defensive sectors such as healthcare. Compared to other traditional defensive sectors, healthcare stocks are typically less sensitive to interest rate changes.

Additionally, he notes that financial stocks generally perform well in a rising interest rate environment.

Funds that can be used to implement these investment strategies include the Vanguard Health Care ETF (VHT-US) and the SPDR Financial Sector ETF (XLF-US).