Rotate out of "safe haven" assets and into commodity and industrial stocks, which do better historically during times of rising rates, according to Wells Capital Management chief strategist Jim Paulsen.
"Because the character of this [economic] recovery is undergoing a transformation, investors should anticipate that leadership in the stock market will also probably be altered," Paulsen wrote in a research note Tuesday.
In the past year, the strategist explains that investors have been fixated on a "risk-off" mentality, mainly sticking with large-cap, dividend-paying U.S. companies and other bond surrogates.
But as the U.S. economy approaches near full employment and expectations of higher growth ahead are baked in, Paulsen thinks interest rates will likely trend higher and the Fed will be forced to end its accommodative policies — therefore driving a rotation into high-growth stocks.
Since reaching a multiyear low in July, the yield on the 10-year U.S. Treasury note has spiked by nearly one full percentage point.