Wells Fargo says the probability of a correction is rising, so hide out in these quality stocks

Published Mon, Dec 20 20212:13 PM ESTUpdated Mon, Dec 20 20216:40 PM EST

Wells Fargo has highlighted several stocks that could offer investors some protection should the market experience a significant correction, which the firm expects to happen by the end of the summer. The firm sees the probability of a roughly 10% market slump increasing and expects a "healthy repricing" of risk as rising froth and decelerating growth lead to more instability, Christopher Harvey, Wells Fargo Securities senior equity analyst, said in a Dec. 20 note. "Declining fiscal and monetary accommodation in 2022 may become more influential," he wrote. "Therefore, stocks will have to 'stand on their own' in a decelerating growth environment where pricing power likely will peak." The bank is recommending cyclical quality stocks from its high-quality large-cap portfolio, which should help investors capture some upside and outperform to the downside. Each stock has an overweight rating by Wells Fargo analysts, a market cap of more than $3 billion, and "favorable" quality, which is based on debt to EBITDA (or earnings before interest, taxes, depreciation and amortization), profit margins and return on equity. "We believe it is time to move up in quality and down in risk," Harvey said. "The Fed has turned hawkish; we are seeing pricing fatigue; growth is decelerating; market froth is abundant; and risk-averse options are relatively cheap but limited... so expect pressure on multiples." Here are 10 of Wells Fargo's picks: Information technology stocks, including Apple and Microsoft , make up the biggest sector in the portfolio. Meta Platforms and other large cap tech stocks are also included. Consumer brands like RH , Under Armour and Walmart are also on the list. Harvey noted that much of consumers' pent-up demand has been satisfied and retailers might have a hard time hiking prices. "We are not worried about the overall health of the U.S. consumer," Harvey said. "Our focus is more the marginal change as it relates to future spending, since we are beginning to suspect the consumer is no longer the price taker it was six to 12 months ago." Finding the pricing sweet spot is one of the biggest risks to the market, he added. "If consumer prices keep rising quickly, the Fed could turn even more hawkish," Harvey said. "But if consumers are no longer automatic price takers, it could hurt corporate margins (and therefore multiples)." JPMorgan , ConocoPhillips , CMS Energy and Vertex Pharmaceuticals are also among Wells Fargo's picks.

Customers inside an Apple store in New York, Sept. 24, 2021.

Jeenah Moon | Bloomberg | Getty Images

Wells Fargo has highlighted several stocks that could offer investors some protection should the market experience a significant correction, which the firm expects to happen by the end of the summer.