Goldman Sachs believes Trump's victory rally in the stock market may not last long

The Dow closed 1,500 points higher on Wednesdayreinforced by Donald Trump's decisive election victory and a possible Republican-controlled Congress, signaling strong market optimism.

Along with the stock rally, U.S. Treasury yields also rose, raising concerns among some analysts about market stability and the potential impact on stocks.

The 10-year Treasury yield rose over 14 basis points to reach 4.433% – its highest level since July. Likewise, the two-year Treasury yield rose about 7 basis points to 4.274%, the highest since July 31.

Yields and bond prices move in opposite directions – when yields rise, bond prices fall. This often signals a shift toward safer investments, suggesting investors may be wary of putting money into stocks amid expected economic changes under new leadership.

So what does a rise in Treasury yield mean?

Goldman Sachs (G.S-2.11%) analyst David Kostin released a report on Wednesday with an updated outlook for the stock markets. In the report, Kostin warned that a significant rise in 10-year Treasury yields could hinder a sustained rally in stock prices.

“Another sharp rise in 10-year Treasury yields would likely limit the extent of any potential rally in stock prices,” he wrote.

Kostin noted that stocks have managed to absorb higher returns so far, largely because improving economic data has fueled the rise. But he warned that a sustained rise in bond yields could cut into market gains, allowing the rally to concentrate in certain stocks while limiting the performance of a broader sector. This trend could be due to investor caution, as higher yields make safer investments such as bonds more attractive compared to stocks.

Interest rate cuts are in sight

In the report, Kostin predicted that the Federal Reserve would cut the key interest rate by 25 basis points on Thursday, bringing it down to a target range of 4.5% to 4.75%. He also expected another quarter-point rate cut at the Fed's upcoming meeting on December 18. Kostin said these rate cuts are likely part of the Fed's strategy to support economic growth amid changing financial conditions and provide some relief to borrowers as bond yields rise.