Is it insensitive to tell my friend that he needs to stop going after girls that are out of his league?
That does sound insensitive so why do you need to tell that to your friend?
Because I can't stand by and see him decrease his chances of getting a girlfriend.
You're expected to support your friend in his pursuit. It's rude tell him that he's not good enough for particular girls.
I'm going to tell him anyway because of my personal morals.
Even if it is against your morals, the nice thing to do is to encourage your friend rather than demoralize him.  You should let your friend try to get any women he wants so that he learns on his own, than you don't have to seem like a bad friend.