Goldman: S&P 500 poised to rise with bond yields

Goldman Sachs says that if economics and monetary policy expectations, not inflation, continue to drive the rise in bond yields, the S&P 500 will continue to rise.

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Goldman: S&P 500 poised to rise with bond yields

June 3, 2013, 9:12 AM

The S&P 500 index  SPX +0.59% still looks attractive, despite the fact that we are beginning a month with the 10-year Treasury note 10_YEAR +0.09%  yield roughly half-a-percentage point higher than the start of the previous one.
So says Goldman Sachs, the investment bank that predicted back in April that interest rates would rise to 2.5% by the end of 2013. They are hanging onto that prediction, but say that as rates rise higher, U.S. and European equities can too.
Because the rise in yields during the month of May was driven by expectations of economic growth and potential U.S. monetary policy changes — rather than inflation fears — the bank is still bullish on companies listed in the S&P 500.
Goldman analysts, led by Chief U.S. Equity Strategist David Kostin, say that if those factors continue to drive the trend of rising yields, the S&P will remain attractive.
They recommend buying stocks in sectors that are sensitive to yields, namely financials and industrials. Read more about why rising yields support financials stocks.
They cite three reasons for their bullishness in a Friday note:

“1) S&P 500 valuation has exhibited positive correlation with 10-year yields since 2000;
2) A large equity — bond yield gap can tolerate higher bond yields; and
3) A better growth outlook is good for EPS growth”

Last week the 10-year Treasury yield passed the  S&P 500 index dividend yield, prompting questions about whether investors would move from stocks back into bonds. But in a Monday note, Goldman further reiterated its stance, noting a revision upward in dividend forecasts.

“We increase our S&P 500 dividend forecasts but upside still remains limited — implied growth has been very correlated with equities.”

Goldman revised its forecasts higher after the first-quarter of 2013 outperformed, it said in a Friday report. It raised its forecast to $35 in 2013 based on annual growth of 11% and $38 in 2014 based on annual growth of 10%.
Read: Why dividend yield stocks are getting dumped.
– Ben Eisen
Follow Ben on Twitter @beneisen
Follow The Tell @thetellblog
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Goldman: S&P 500 poised to rise with bond yields