A rising interest rates environment is typically beneficial for banks because it boosts profitability on loans. But bank stocks in the U.S. have done poorly this year despite the Fed raising rates three times, with a fourth hike expected to come next month.
Morgan Stanley expects the Fed to take a break from raising rates in June next year.
"The irony is that financials didn't do well this year when rates are going up, it may be the case that financials do better in 2019 as the Fed backs off," Mike Wilson, Morgan Stanley's chief U.S. equity strategist, told CNBC's Sri Jegarajah.
"The financials figured out that the Fed was tightening too rapidly and so rates were going up, sure, but they realized that that was going to lead to slower growth. Now, if the Fed pauses, financial stocks may actually sniff that out and say 'hey, that's a good thing' and they may actually outperform in 2019," he said at the Morgan Stanley 17th Annual Asia Pacific Summit in Singapore.
Morgan Stanley earlier this week said it maintained an "overweight" stance on U.S. financial stocks for 2019. But the bank downgraded U.S. equities as a whole to "underweight."