Since the US presidential election day, the s&p 500 index has risen by about 300 points, with a cumulative increase of over 30% in the past year. However, as 2025 approaches, can the frenzy in the US stock market continue?

In a research report by Bank of America Merrill Lynch on November 15, it was pointed out that although there are no signs of a bear market in the US stock market at present, signals that could change the situation are still worth exploring — such as the surging US Treasury yield.

Typically, when the yield on the US 10-year Treasury notes rises to 5%, investors tend to shift funds from stocks to bonds. Currently, the yield on the US 10-year Treasury notes has risen by 80 basis points since mid-September, and is poised to hit 5%.

Bank of America Merrill Lynch has set the target price for the s&p 500 index at 6000 points by the end of 2024 (currently at 5870 points), and expects the earnings per share (EPS) of the index in 2025 to rise by 13% to $275.

The bank also pointed out that when the yield on the 10-year US Treasury notes rises above 5%, investors will shift to the bond market, limiting the rise of US stocks. However, the overall interest rate risk is manageable at present. The uncertainty of tariffs and policies during the "Trump 2.0" era will also impact US stocks.

Will the situation in the US stock market reverse when the US bond yields rise to 5%?

Since mid-September, the yield on the US 10-year Treasury notes has been climbing by about 80 basis points, and the soaring bond yields seem to have begun to put pressure on US stocks. The upward trend of US stocks may face a collapse when the US bond yields reach 5%.

Bank of America Merrill Lynch pointed out that when the 10-year treasury notes yield exceeds 5%, investors may shift from stocks to bonds, and Wall Street's stock allocation typically decreases.

Last week, the U.S. 10-year benchmark treasury yield was around 4.44%, with a cumulative increase of about 14 basis points for the week, currently reported at 4.451.

However, the bank believes that the current interest rate risk is manageable, as 80% of the debt in the S&P 500 index companies is long-term fixed-rate debt, compared to less than 50% in 2008. At the same time, the current real yield is around 2%, which is basically consistent with the average level since 1950.

Real interest rates may be more comparable to the stock market. Although real interest rates may further rise, this process may not necessarily have a negative impact on the stock market, as similar situations have occurred in history. For example, during the productivity boom period from 1985 to 2005, the average real interest rate was 3.5%, while the annual return rate of the S&P 500 index was 15%.

Trump 2.0 impacting U.S. stocks

Bank of America Merrill Lynch predicts that by 2025, the earnings per share (EPS) of the S&P 500 index will increase by 13% to reach $275. It is expected that under the "Trump 2.0" policy, tax cuts, regulatory relaxation, and industrial reshoring will drive the cyclical growth of the stock market. However, Trump's tariffs and immigration policies may also bring potential risks. Specifically:

• Tariff policies may lead to a decrease of more than 10% in the earnings per share (EPS) of the S&P 500 index.
• The uncertainty of policies may push the global economy into a recession, causing a 20% decrease in earnings per share (EPS).
• Tightening tariff and immigration policies may trigger inflationary shocks, driving up the yield of 10-year Treasury notes, leading to a 10% decrease in earnings per share (EPS).

In addition, the bank's research report points out that at least five indicators currently show that the sentiment and positioning of the US stock market have become overly optimistic, limiting the market's upside potential.

The bank has seen some signs of frenzy in large-cap technology stocks, especially the U.S. 'Big Seven,' with sell-side analysts setting historical highs for their long-term growth expectations despite their already substantial size and intense competition in artificial intelligence investments. Meanwhile, U.S. cyclical stocks and high-dividend stocks continue to be overlooked by the market. Bank of America Merrill Lynch believes that these neglected sectors may see rotation opportunities under the Trump 2.0 policy.