Stocks have been selling off in recent sessions, as the 10-year yield broke out to new 7-year highs after Fed Chairman Jerome Powell said the Fed is nowhere near neutral with its rate hiking. Neutral is a level at which interest rates neither stimulate nor stall the economy.
Despite the runup in rates, BofAML analysts said it is not time to sell equities.
"We think stocks, especially large caps, are attractive amid rising rates based on historical analysis and the output of our other models. Rising rates are a more definitive reason to sell bonds, in our view," they said.
However, there are stocks that could have problems, or hit "pot holes," as interest rates go higher, the analysts said. Those stocks include high-dividend-paying "bond proxies"; growth stocks that are credit sensitive with no current earnings, and companies that have not used low rates to lock in lower debt payments.
The analysts also see risk in small caps. "Not only are they longer duration and more credit sensitive than large caps, but they have more floating rate risk and are close to record leverage," they said.
The analysts said they prefer medium duration, dividend growth companies. Those type of stocks are generally in their preferred sectors, which include health care, materials, financials, industrials and old technology.
WATCH: Could bonds be a buy now?