Wells Fargo sees a modest overall market rise in 2021, but big gains for these 'Covid beta' stocks

Published Mon, Dec 7 20209:50 AM EST

(This story is for CNBC Pro subscribers only.) Wells Fargo only expects marginal gains for the overall market next year, but a handful of stocks are poised for strong outperformance. The Wall Street firm sees the S & P 500 reaching 3,850 by the end of 2021, a 4% gain from its current level. Earnings for the 500-stock average are expected to come in at $160.20 per share, Wells Fargo said. "For 2021 we see a durable, 'textbook' recovery/reflation trade that supports cyclicality, high-Covid Beta, and small caps," Wells Fargo Head of Equity Strategy Christopher Harvey told clients on Monday. Stocks have experienced a unprecedented year due to the economic impact from the coronavirus pandemic. After experiencing the fastest bear market in history in the first quarter, equities started their swift rebound off the March bottom, supported by historic monetary and fiscal stimulus. The major averages saw the Dow, S & P 500 and Nasdaq Composite hit intraday and all-time closing highs during Friday's session. All three are also coming off their fourth positive week in five. Wells Fargo sees equity markets shifting loyalty from the high-momentum "work-from-home" trades to small caps and cyclicals in the new year. Harvey said small caps have historically low absolute values and cyclicals' soft comps in the first half of 2021 sets them up for a strong finish to the year. "The rapid V-shaped earnings rebound, the imminent start of vaccinations, 'excess' cash on the sidelines; and sequential improvement all point to sustained recovery in 2021," said Harvey. "The recession was sparked by an exogenous shock, not because systematic risk was too high. Therefore, we expect an atypical reaction and recovery path due to the nature of this recession." The Wall Street firm also expects about $1 trillion in excess cash on corporate balance sheets by the end of 2020, which should spur merger activity and buybacks. Covid Beta Wells Fargo made a "Covid Beta" portfolio made up of the stocks its expects will perform well in 2020. The firm also separately screened for overweight-rated small cap value ideas and lastly found a handful of companies that were active stock repurchasers pre-Covid, but have since slowed down buybacks despite building up cash. The "Covid Beta" basket is made up of S & P 500 banks and select diversified financials. Major U.S. banks Morgan Stanley , Citigroup , Bank of America , Goldman Sachs and JPMorgan all make the list. Plus, Citizens Financial , Truist Financial , PNC Financial and First Republic Bank also made the list. The small cap value portfolio spans across the consumer discretionary, energy, healthcare, information technology and real estate sectors. Foot Locker , Capri Holdings , WPX Energy , EQT , Pinnacle Financial, Pure Storage , SVMK , Agree Realty and STAG Industrial all make Wells Fargo's list. Finally, the buyback portfolio is made up of companies that Wells Fargo believes are positioned for increased share repurchase activity in 2021. Booking Holdings , Carmax , Ralph Lauren , Starbucks , Valero Energy , Amgen , Cardinal Health , United Rentals , Applied Materials , NetApp and Cisco Systems all made Well's Fargo's list. — with reporting from CNBC's Michael Bloom.

Ralph Lauren signage is seen on the window of a store on Prince Street in New York.

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(This story is for CNBC Pro subscribers only.)

Wells Fargo only expects marginal gains for the overall market next year, but a handful of stocks are poised for strong outperformance.