Quality stocks are about to outperform this year, according to Bank of America. The market is now on a volatile streak after a strong rally in January with a series of hotter-than-expected inflation numbers, recessionary fears and the prospect of further rate hikes rattling investors. Prominent strategists, such as Morgan Stanley’s Mike Wilson, believe that the market could fall to a bear market this month. Against such a backdrop, equity strategist Savita Subramanian at Bank of America advised investors to own high quality stocks — specifically stocks with a rated high quality by S & P. A basket of such stocks outperformed low quality stocks by 1.2% in February. “Volatility is here to stay — own Quality,” Subramanian wrote in a Wednesday client note. “Tailwinds for Low Quality from fiscal and monetary stimulus are now over, and we recommend owning High Quality stocks,” she added. To be sure, Subramanian said that while high quality shares are still lagging low quality shares year-to-date, the bank anticipates the economy entering a downturn, during which quality factors have typically outperformed. With this in mind, CNBC screened for stocks in the S & P 500 that had the highest quality rating of A+ as determined by S & P Global Market Intelligence. S & P bases its quality rankings on a number of factors, including consistency of earnings and dividend growth over the last 10 years. Take a look at the S & P 500’s top-quality stocks. Semiconductor maker Applied Materials made the list, with shares jumping almost 20% in 2023. However, the stock has fallen 13.5% during the past 12 months. Nevertheless, analysts are confident in the stock, with 70% of those covering it giving it a buy rating and anticipating an average upside of 12.24%. Digital payment companies Mastercard and Visa also made the list. Visa shares have gained almost 5% since the start of the year, and analysts predict it will rally an estimated 20.2% in the next 12 months. 35 out of 40 analysts covering Visa rate it a buy. Mastercard is also a favorite among both mutual funds and hedge funds, according to Goldman Sachs. The average price target for the stock is $424.49, which implies a 20% upside from its Wednesday closing price. Shares have risen almost 3% during the last 12 months. Domino’s Pizza is another stock with an A+ rating in the S & P 500. Shares have dropped 12.3% in 2023 after its quarterly sales and revenue missed analysts’ estimates. However, analysts are still optimistic about the stock, with 13 out of 33 analysts issuing it a buy rating. Analysts also believe the company’s new potato tots offering could raise the company’s sales. Several home improvement retailers were also picked as the crème de la crème of the S & P 500. Home Depot shares have fallen 7.7% this year after its fourth-quarter earnings fell short of Wall Street’s estimates. Yet analysts predict it will rally again in the next 12 months — it has a target upside of 12.3%. Lowe’s shares have also dipped this year, falling 2.5%, but many analysts still believe it is a buy. “The concept of Lowe’s ‘closing the gap’ in its same-store sales growth and operating margin with that of Home Depot is another key element of the investment thesis,” Bank of America said about the stock. —CNBC’s Michael Bloom contributed to this report.
