Stocks could be set up for a “meaningful correction” if bond yields don’t steady, according to one of Wall Street’s top strategists.
Morgan Stanley CIO Michael Wilson has been bullish on US equities for a long time, and he’s not completely changing his tune now. However, he thinks surging bond yields driven by the ongoing war in Iran pose a near-term threat to stock gains.
“If bond vol rises with rising back end rates, we would expect the first meaningful correction in equity prices since markets bottomed at the end of March,” he said in a note on Monday.
The firm just raised its 2026 year-end price target to 8,000 from 7,800, saying its outlook is based on a hot economy, public to private rebalancing, and a broadening of earnings and performance.
“Bottom line, this is an earnings story, not a multiple expansion one,” Morgan Stanley explained.
But, rising bond yields could derail the rally that’s taken indexes to all-time highs in recent weeks. Yields continued their upward March on Monday, with the 10-year US Treasury rising to 4.6%, the highest level in a year. In international markets, Japan’s 30-year bond has risen to its highest level ever.
“For the last several weeks, we have been pointing out the significantly negative (-0.8) correlation between equity returns and change in bond yields,” the strategist wrote.
Morgan Stanley flagged 4.5% for the 10-year yield as “the point at which rates could serve as more of a noticeable headwind for equity multiples.”
Christian Hoffmann, Thornburg Investment’s head of fixed income, pointed out that the 30-year yield breaking out over 5% is another sign for short term caution.
Morgan Stanley
Morgan Stanley strategists noted, “At the end of the day, the jump in rates and hawkish shift in the Fed’s tone is largely attributable to the oil spike and an economy that is running hot.
The firm explained that the market will need to see a resolution to the war in Iran to stop the rise in bond yields. “We may need to see a more durable resolution in the conflict before yields fall,” they said.
Thierry Wizman, Macquarie Group’s global foreign exchange and rates strategist said the Federal Reserve has an opportunity to stabilize bond rates if the central bank takes a hawkish tone.
“If that doesn’t happen, traders will conclude that the Fed is falling behind, and a further rise in US inflation risk premiums and a new steepening of the yield curve may ensue,” he warned.