Inside Markets — Easy-to-Identify Risk

Higher bond yields remain the easy-to-identify risk for equity investors as we kick off 2025. Monday’s bullish reversal in 10-year Treasury prices (yields lower) may have been the result of quarter-end pension rebalancing, but it still marks a key near-term technical level at 4.63%. A sustained break above that level would likely generate increased bond market volatility that could spill into equity markets. Remember, the SPX has ‘earned’ its 20x forward multiple (now on ’26 estimates) during a prolonged period of subdued equity volatility. Elevated equity volatility (VIX>22) would lead to multiple compression. Friday’s Jobs Report is the next major catalyst for bond markets. All risks are two-sided with 10-year yields below below ~4.35% becoming a bullish tailwind for equity markets. A sustained break below ~4.13% would add more significant upside pressure with likely rotation into small/mid-cap stocks with cyclical exposure.