Bank of America sees a super volatile year ahead but has 2 stock-buy strategies so you can sleep at night

Published Tue, Dec 6 20221:53 PM EST

Investors should brace themselves for a rocky year ahead, according to Bank of America. The S & P 500 could fall to 3,000 in the first half of 2023 amid a recession, earnings cuts, persistent inflation and the Federal Reserve's reduction of its bond holdings, known as quantitative tightening, said Savita Subramanian, the firm's head of U.S. equity and quantitative strategy. That's a roughly 25% drop from Monday's close. Then, the index will snap back as uncertainty, earnings revisions and interest rate volatility improves, she wrote in a note Tuesday. "We expect another volatile year and recommend owning High Quality stocks … But today's High Quality stocks look different than a few years ago (e.g. Energy & Financials are much higher quality today)," Subramanian said. "We expect dividends to represent a much bigger chunk of total returns going forward." With that in mind, she looked for high-quality defensive stocks and those that have consistently grown their dividends so that investors can sleep at night. High-quality names For high-quality names, she screened S & P 500 stocks that are ranked B+ or better by S & P Quality Rank and are in the bottom quintile by gross-domestic-product beta, meaning they are less sensitive to changes in the economic cycle. Here are 10 of those names. CarMax has had a difficult year. The used-car dealer reported one of its biggest earning misses ever in September as inflation and high interest rates kept consumers from its auto dealerships. Shares are down about 50% year to date. Valero Energy , on the other hand, is up just shy of 60% so far this year. The oil refiner posted third-quarter earnings and revenue that beat Wall Street's expectations in October. CEO Joe Gorder cited strong refining fundamentals, with product demand through its system surpassing 2019 levels. Also on the list is Humana, which gained 16% year to date. The health insurer beat analysts' expectations with its third-quarter earnings report in November. Thanks to a strong open enrollment period, Humana recently boosted 2023 membership growth estimates for its Medicare Advantage products to at least 500,000 members from its previous guidance of 325,000 to 400,000. Financial firm State Street is down nearly 20% in 2022. Through Monday's close, the stock is up 30% from its 52-week low hit on Oct. 13. State Street recently announced it mutually agreed with Brown Brothers Harriman & Co. to terminate its proposed acquisition of BBH's Investor Services business. The company cited further delays in the regulatory path forward and unresolved approvals among its reasons. Consistent dividend growers For dividend growers, Subramanian looked at names that have consistently grown their dividend over time, based on annual data from 1981 through 2021. Here are 10 of those names. Rival big-box retailers Walmart and Target both made the list. Walmart's stock is up nearly 4% year to date and its dividend had a compound annual growth rate (CAGR) of 19% over the period of 1981 through 2021. Target, on the other hand, has lost about 33% this year. Its dividend's compound annual growth rate is around 11%. Analysts view Walmart as the clear winner in retail thanks to its unique positioning and large grocery business. Walmart's strength in its third-quarter earnings came from its food business, which is bigger than Target's. Walmart's per-share earnings beat expectations , while Target reported a third-quarter earnings miss and profit that fell by about 50%. Meanwhile, Medtronic has seen its stock drop more than 24% this year. The global health-care technology company saw its dividend grow at a 15% CAGR from 1981 through 2021. Medtronic reported a fiscal second-quarter revenue miss in November and lowered its guidance for the back half of its fiscal year. "When we look beyond these headwinds of our markets and supply, we have really a fundamentally strong business with attractive end markets and several positive catalysts to drive growth," CEO Geoffrey Martha said at an Evercore ISI conference last week. In October, the company announced plans to spin off two of its smaller businesses into a new company to streamline its portfolio and boost the pace of revenue growth. Lastly, McDonald's has gained about 1.4% this year and its 1981-2021 dividend CAGR was 14.5%. Customers haven't been scared away by the fast-food chain's higher prices. In fact, traffic to its U.S. restaurants is growing , McDonald's executives said on its most recent earnings call in October. Same-store sales in the U.S. increased 6.1% in the third quarter. — CNBC's Michael Bloom contributed reporting.