It might be too soon to call “all-clear” while there is still bond volatility, according to Morgan Stanley’s CIO.

Lisa Shalett, Morgan Stanley Wealth Management’s chief investment officer, said markets have partially recalibrated after recent volatility, with oversold technicals driving a rebound in lagging sectors like financials (XLF).

“The market is behaving in a very rational manner in the ultra-short term,” she told CNBC during an interview, though she cautioned against declaring an “all clear” given persistent macroeconomic risks.

Earnings revisions remain a critical concern, with Morgan Stanley’s Mike Wilson cutting his 2025 S&P 500 (SP500) EPS forecast to $257 --  down from $271 -- amid slowing growth. Wilson also revised its 2026 EPS forecast down to $281 from $303.

Shalett emphasized that equities still trade at over 20x forward P/E ratios, urging investors to avoid “getting too far over your skis” despite selective bargains.

“Our base case is a soft landing, but barely,” she added, noting a 40% recession probability.

She expressed heightened concern over U.S. Treasury market stability, telling CNBC that bond vigilantes are scrutinizing fiscal deficits and global currency dynamics.

“We’re not at all out of the woods,” she said, highlighting risks from hedge fund basis trade unwinds and shifting demand for long-duration Treasuries.

On tariff-exposed sectors like healthcare (XLV) and semiconductors (SMH), (SOXX), Shalett advised focusing on high-quality names with pricing power.

“You can’t count on anything as permanent,” she told CNBC, advocating for stock-picking in resilient industries, such as financials (XLF) and some healthcare (XLV) names that align with a disciplined value approach amid geopolitical crosscurrents.

Investors can watch the current bond action here.