U.S. 10-year Treasury yields rose to 5.35% on Wednesday, yet Bank of America's long-term valuation model suggests that the S&P 500's returns over the next decade may not exceed 5%. As bond yields continue to rise, U.S. stocks just set a new closing record.
According to Bloomberg, Savita Subramanian, head of U.S. equities and quantitative strategies at Bank of America ( Savita Subramanian ), made the above comparison in an interview with Bloomberg TV. She believes that bonds are becoming a strong competitor to stocks for the first time in decades.
This judgment is based on the valuation returns for the next decade and is not a prediction of short-term fluctuations in U.S. stock prices. The report does not disclose the specific return figures of this model; moreover, a U.S. Treasury yield of over 5% cannot be directly considered as the return already achieved by bond investors over any arbitrary holding period.
According to Bloomberg, earnings and expectations for artificial intelligence spending are still supporting the U.S. stock market.
Subramanian is concerned that the profit expectations behind stock prices are already very high. She says that analysts' forecasts for earnings growth of the S&P 500 over the next five years are at historical highs, and such optimism makes the market more prone to disappointment rather than surprises that exceed expectations.
While bonds offer higher yields, long-term price pressures continue. Tradeweb data shows that on Wednesday this week, the yield on 10-year U.S. Treasury bonds rose by 3.2 basis points to 5.301%, and the yield on 30-year bonds rose by 4.4 basis points to 5.684%.
Jens Peter Sørensen, chief analyst at Danske Bank ( Jens Peter Sorensen ), pointed out in a report that both the supply of U.S. Treasury bonds and the financing of large cloud computing companies are putting pressure on the long-end of U.S. debt. He believes that if investors demand a higher premium for the long end, there is a risk that the yields on 10-year and 30-year U.S. Treasury bonds could reach 6%.
Nordic Bank of Sweden ( SEB ) presents another scenario in its forecasts. In its 'Financial Forecast' released on Tuesday this week, the bank expects the yield on 10-year U.S. Treasury bonds with a constant maturity to fall to 5.10% in the fourth quarter of 2026 and to 5.05% in the first quarter of 2027; for both quarters, the bank predicts that the federal funds rate ceiling will be 4.25%.
SEB What is predicted here is the yield level at future points in time, and it cannot be directly subtracted from Bank of America's ten-year stock return estimate. The report also lists U.S. Treasury bonds maturing in August 2036: the yield forecast for the fourth quarter of 2026 is 5.09%, which is different from the 5.10% for the constant-term indicator.
Subramanian also has a different view on the potential for yields to rise. She believes that population structure and the potential inflation-suppressing effect of artificial intelligence may limit the upper bound of long-term interest rates; yields are unlikely to significantly exceed 6% to 7%, while stocks may still be able to withstand such levels.
The U.S. Treasury Department will auction $39 billion in 10-year Treasury bonds on Thursday. The minutes of the Federal Reserve's September meeting will be released at 2 a.m. on Thursday.
