Here are the stocks to buy and the ones to sell if interest rates stay high, says Jefferies

Read: The S&P 500 is flashing a selloff warning after breaking below its 50-day moving average

Our call of the day from Jefferies strategists offers up an approach to stocks that they say works well if U.S. rates are set to stay higher for longer and the economy holds up.

Alongside this and based on a soft-landing scenario, a team led by Desh Peramunetilleke, global head of microstrategy, have lifted their year-end S&P 500 target to 4,500 from 4,050, or up some 1.4% from Tuesday’s close. They say that assumes a 2024 earnings per share estimate of around $230 and a year end price/earnings target of 19.6 times.

Jefferies notes that only 28% of S&P names have outperformed this year, but expects stocks beyond mega cap tech may start participating. Still, Peramunetilleke and co see growth staying low for the rest of 2023, and suggest seeking out sectors with earnings momentum, such as communication services, industrials and consumer discretionary, but not financials, healthcare or energy.

As for the soft-landing playbook, the Jefferies team advises investing in companies with high operating leverage, profitability and robust balance sheets. Cyclicals make up the bulk of those names, and they see autos, discretionary retail, software, materials, capital goods and commercial services faring best in a strong-growth scenario,

Here’s a partial list of their picks — Adobe
ADBE,
-0.68%,
Intuit
INTU,
-1.70%,
ADP
ADP,
-0.39%,
TJX
TJX,
-0.51%
and 3M
MMM,
-2.20%
are at the top:

On the other side of that trade, Peramunetilleke and the team say a soft landing view is less positive for companies with high short-term debt and gearing. Their screen came up with several utility names, such as Duke Energy
DUK,
-1.45%,
Dominion Energy
D,
-2.43%,
American Electric Power
AEP,
-1.13%,
Edison International
EIX,
-1.35%
and Eversource Energy
ES,
-3.14%.
General Motors
GM,
-2.26%
is also on that list.

That’s not the only theme Jefferies strategists think investors should be paying attention to right now. They are keen on companies with cashflow-supported buybacks, cash-rich balance sheets and stable businesses with higher returns. Those names include Apple
AAPL,
-1.12%,
Alphabet
GOOGL,
-1.18%,
Meta Platforms
META,
-1.38%,
AbbVie
ABBV,
-0.10%
and Cisco
CSCO,
-0.98%
at the top.

The AI wave is another theme that Jefferies updates on, noting that their basket of stocks correlated to AI king Nvidia has outperformed S&P 500 by 36% since the beginning of the year, while also demonstrating a robust earnings outlook. But they caution that “the basket’s stretched valuations are concerning.” The top five names in that basket are Broadcom
AVGO,
-1.36%,
Oracle,
ORCL,
+1.49%
Adobe
ADBE,
-0.68%,
AMD
AMD,
-0.56%
and Applied Materials
AMAT,
-1.28%.

The markets

Stock futures
ES00,
-0.09%

YM00,
-0.04%

NQ00,
-0.11%
are mildly higher following Tuesday’s rout, with the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
at 4.18%, and the dollar
DXY
and oil
CL.1,
-0.11%
lower.

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The buzz

Housing starts and building permits for July are due at 8:30 a.m., followed by industrial production at 9:15 a.m. and the minutes of the Fed’s July meeting at 2 p.m.

Target
TGT,
-2.55%
lowered its profit forecast for the year, citing recent sales trends, though its second-quarter profit handily beat estimates and shares are up 8% in premarket.

Tech names Cisco
CSCO,
-0.98%
and Synopsys
SNPS,
+0.43%
will report after the close.

Plus: Why is Palo Alto Networks reporting earnings Friday afternoon? The strange timing draws speculation.

H&R Block
HRB,
+0.54%
stock is up 5% after upbeat results from the tax-preparer.

Shares of Sacks Parente
SPGC,
+624.25%
are slumping after a strong rally Tuesday on the golf-equipment maker’s Nasdaq debut.

Intel
INTC,
-2.55%
has called off its proposed $5.4 billion acquisition of Tower Semiconductor
TSEM,
-0.47%
after failing to win the needed regulatory approvals.

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