The 10-year Treasury yield has continued its climb to kick off 2025, and Morgan Stanley is recommending that investors stick with quality stocks to manage any ensuing market tumult. Contributing factors behind the benchmark yield’s rise include expectations for a less-dovish policy stance from the Federal Reserve and a rise in term premium – that is, the additional yield investors demand in exchange for the risk of holding fixed income – according to Morgan Stanley’s chief U.S. equity strategist Michael Wilson. “Recently, these drivers have pushed the 10-year yield above 4.50% and the correlation of equity returns to bond yields has flipped decisively into negative territory (yields up, stocks down and vice versa) – something we have not seen since last summer,” he wrote in a Monday note. “The combination of these factors makes rates the most important variable to watch in early 2025, in our view.” Indeed, on Monday, the 10-year Treasury yield topped the 4.6% level at its session high. “The recent rise in rates provides yet another reason to stay up the quality curve as companies with stronger balance sheets/less leverage are likely to remain less rate sensitive,” the strategist continued. US10Y 1M mountain US10Y, 1-month While Wilson sees market leadership broadening this year, he believes that this could be concentrated in “larger cap, higher quality” names, given that an economy entering a “later cycle environment” is in line with outperformance of this group. He also said that relative earnings revisions for those with a high quality factor are “inflecting higher.” Taking that into account, Wilson’s team screened for cyclical, growth and defensive stocks that have a market cap in the top 1,000 and whose quality composite score is considered “above median” compared to their industry peers. All of the stocks that made the screens also have an overweight rating from the firm’s analysts. See below for a list of names that made the grade. Artificial intelligence chip darling Nvidia is a standout among those in both the cyclicals and growth groups after soaring more than 171% in 2024. On Monday, Nvidia shares rose more than 4% alongside other chip plays after contract electronics giant Foxconn posted record fourth-quarter revenue . Much of Wall Street is sticking with Nvidia for the year ahead. According to LSEG data, 59 of the 65 analysts covering the chip giant have a strong buy or buy rating, while the remaining six have a hold rating. The consensus price target suggests upside potential of more than 12%. Joining Nvidia in the growth group, Chewy is coming off a positive 2024 after seeing shares decline for three consecutive trading years from 2021 through 2023. Last year, the stock solidly outperformed the broader market, rising more than 41%. The stock added 4% on Monday after Mizuho upgraded it to outperform from neutral, a bullish call that joins most analysts on the Street. To be exact, of the 31 analysts covering it, 18 have a strong buy or buy rating, per LSEG. However, consensus price targets suggest more than 3% downside from current levels. When it comes to defensive names, Walmart is a key stock on the list, having soared about 72% in 2024. Analysts see that run continuing, as 41 out of 44 of them have a strong buy or buy rating, according to LSEG. Consensus price targets call for more than 7% upside from current levels.
Morgan Stanley says high rates threaten bull market. Ride it out in these stocks