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 grad
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