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Pro Analysis

Wall Street is telling clients to brace for volatility

An employee holds a Stanley Black & Decker Inc. cordless drill while helping a customer at a Home Depot Inc. store in New York.
Victor J. Blue | Bloomberg | Getty Images
An employee holds a Stanley Black & Decker Inc. cordless drill while helping a customer at a Home Depot Inc. store in New York.

After months of calm waters, market volatility may be picking up with the 2.5 percent decline Friday in the S&P 500. In response, Wall Street firms are telling investors what they need to buy to outperform in a more unstable environment.

Deutsche Bank's David Bianco wrote an 8 to 10 percent market sell-off is on the table.

"S&P realized volatility has been extremely low the last six weeks, but we think this is the quiet before the storm," Bianco said in the note to clients Friday. "Near term we favor Utilities & Telecom over Financials. We favor lower PE mega-caps."

Bianco cited analysts this fall cutting 2017 earnings estimates for S&P 500 companies and U.S. election uncertainty as catalysts for higher market volatility.

In similar fashion, Barclays' Jonathan Glionna predicts the recent rotation to more risky names such as the technology sector will end.

"Prior to Friday's sell-off, the rotation into beta, value and cyclical stocks and out of stocks with low volatility and bond proxies since early July had been considerable," Glionna wrote in a note to clients Monday.

"Given high valuations, weakening data and central bank uncertainty, we recommend positioning for increased volatility."

The strategist provided a list of stocks to buy with higher dividend yields and elevated dividend growth versus the market with less exposure to interest rate tail risk.

Here are seven stocks that made Barclays' recommended screen for a more volatile market.