24 Quality Stocks to Buy While Rates Keep Rising: BMO

  • The US economy has defied expectations and has remained strong despite higher interest rates.
  • But BMO Capital Markets warns weakness could be coming as monetary policy operates with a lag.
  • Here are 24 quality stocks to buy now to protect your portfolio from higher interest rates.

To the shock of the Federal Reserve and many on Wall Street, the US economy refuses to die.

Higher interest rates, aimed at curbing inflation, have not stifled economic growth, slashed consumer spending or boosted the unemployment rate as so many expected last summer.

Instead, inflation-adjusted GDP growth was resilient for a second straight quarter, retail sales remained strong and the labor market continued to create jobs.

This strength encourages the US Federal Reserve to raise interest rates more than originally planned. While investors fear that further rate hikes could jeopardize the three-year expansion of the economy, recent economic data suggests the economy could use a little more tightening.

“The US economy has shown surprising resilience to weather the blizzard of Fed rate hikes over the past year,” wrote Douglas Porter, chief economist at BMO Capital Markets, in a quarterly research report published March 9.

All eyes are on the Fed and inflation

However, BMO believes the U.S. economy isn’t out of the woods just yet — so neither are its stocks.

Monetary policy is having a delayed effect, Porter noted, adding that households still have ample savings that they have used to meet their pent-up needs for travel and other personal activities.

But when the Fed’s rate hikes take full effect, excess savings will dry up and pent-up demand will ebb. Porter also warned of fewer hires and more layoffs at an unemployment rate of 4.4% or higher. The economy will also face other headwinds, including declines in real GDP, house prices and fiscal stimulus.

“Despite a solid start to the year, we continue to expect a modest dip this year on tighter financial conditions, reflected in the sharply inverted yield curve and a prolonged decline in leading indicators,” Porter wrote.

Heading into 2023, BMO, JPMorgan and some other companies thought that a weaker economy and slowing inflation could prompt the Fed to cut interest rates in the second half of the year. The resilience of the labor market and the Fed’s recent reports of the possibility of further rate hikes make this dovish outcome “highly unlikely,” Porter wrote.

The US is at a tipping point, Porter noted. The Fed’s interest rate decision — and possibly the short-term future of the economy — depends on how hot or cold inflation is in next Tuesday’s report.

“Stubborn inflation may require even more restrictive policies, resulting in a much harder landing,” Porter wrote. “We assign a probability of around 15% to this scenario. However, there is likely a greater chance (35% chance) of avoiding a downturn altogether if inflation falls faster than expected, paving the way for earlier policy shifts and easier financial conditions.”

24 Quality Stocks to Buy Right Now

Investors who don’t want to bet everything on a positive inflation report can protect their portfolios from potential pain by buying quality stocks, according to BMO.

Quality stocks are beginning to break out and take the reins from value companies that the company says have been among the top outperformers over the past year. This is based on each style’s Information Ratio (IR), which is the primary metric BMO uses to estimate risk and reward for stocks.

“US quality has steadily climbed to the top of our quantitative rankings over the past quarter and is poised to become the first factor group to outperform in 2023,” wrote David Cheng, an ETF and quantitative analyst at BMO, in the same quarterly report.

BMO quality chart

BMO Capital Markets

Below are 24 US stocks that BMO says currently have the best prospects for strong risk-adjusted returns. Along with each is its ticker, market cap, sector and decile rank for its information ratio, with 1 meaning it is in the top 10% of companies.

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