Surging yields have been a key driver of stocks over the past few weeks.

But as yields retreat from their 16-year highs and the S&P 500 stays above 4,200, Bank of America strategist Michael Hartnett believes we've found resistance in the current bond-driven dynamic.

If yields go above 5% for an extended period, stocks could be in trouble, according to Hartnett. He called 5% yields "clearly a big line-in-sand for the Fed."

Importantly, Hartnett noted other headwinds haven't derailed the market amid the bond yield concerns. Recent economic data has displayed the preferred Goldilocks characteristics of not being too "hot" or too "cold." The September jobs report showed the US labor market remains tight with job additions but also that wage increases are easing, indicating the consumer's willingness to pay for higher prices could be weakening.

On the inflation front, prices in core sectors tracked by the Fed continued easing. The central bank also noted that higher yields might eliminate the need for an interest rate hike rate in November anyway. And for now, the geopolitical tensions in the Middle East don't appear to be signaling a broader conflict in the region, making it unlikely a spike in oil prices will hold.

Oil prices above $100 a barrel — about $14 more than Friday morning's price for West Texas Intermediate— is one of the key risks Hartnett sees that could send the S&P 500 below 4,200. The impact of higher yields and how that weighs on business activity will also be in focus for Hartnett.

He noted that clear signs of a small business credit crunch causing higher unemployment could be another bearish sign for stocks.

Broadly, strategists haven't pinned down one thing that's driving bond yield action. But after a surge in bond yields on Thursday erased the stock market gains for the day, one thing is clear: Current market sentiment is that if yields rise, stocks are going to drop.

And while those yields could weigh on equities in the short term, they could also be what eventually drives the Fed to cut rates, a key turning point for stocks in the long term, per Hartnett. 

Investors "need" a recession and Fed cuts to "ignite new bulls," Hartnett wrote.

Josh Schafer is a reporter for Yahoo Finance.

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