A rise in bond yields will pose a serious threat to the U.S. equity market at a time when earnings momentum remains weak, Societe Generale warns.
The French lender predicts that the S&P 500 will be flat "at best" for the coming quarters with a continued risk of a short-term correction.
"Rising bond yields during period of economic recovery are not necessarily bad for equities. However, at a time when earnings momentum remains weak and the consensus earnings growth estimate is expected to moderate, rising bond yields could be a catalyst for a U.S. equity market correction," a strategy team led by Alain Bokobza at Societe Generale, said in a research note on Friday.
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If the U.S. Federal Reserve, as expected, starts to wind-down its bond-buying program, the price of U.S. Treasurys are expected to fall as a big source of demand drops off. This will send the yields on the bonds higher, as bond prices and yields move in the opposite direction.
SocGen expects U.S. government bond yields to approach 4 percent by December 2014. But the bank also suggests a U.S. government bond yield of between 3-3.5 percent could trigger a correction of between minus 12-22 percent for U.S. equities on the current equity risk premiums.
On Friday, yields for U.S. Treasurys rose to 2.740 percent, from 2.6018 percent late on Thursday, after unexpectedly strong job gains for October despite a partial government shutdown, suggesting resilience in the world's biggest economy.
Employers added 204,000 jobs to payrolls, the Labor Department said, sharply above expectations from economists in a Reuters poll for a gain of 125,000.