S&P 500 Stocks With The Highest Quality Could Win In This Volatile Market

Bank of America's research shows that quality stocks are likely to outperform this year as well.

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Following on from a strong rally in January, the market is now on a volatile streak following a series of inflation numbers that were hotter-than-expected and recessionary concerns that have shaken investors' confidence, as well as the possibility of further rate hikes. Morgan Stanley's Mike Wilson, one of the nation's most prominent strategists, believes that this month could be the turning point for the market to enter a bear market.  

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Savita Subramanian, an equity strategist at Bank of America, recently recommended that investors own stocks that have been rated as high quality by S&P, against a backdrop of such a backdrop. During February, a basket of these stocks outperformed a basket of low-quality stocks by a margin of 1.2%. 

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"Volatility is here to stay - on your quality," Subramanian wrote in a client note sent on Wednesday to clients. “The tailwinds that have been blowing in recent months for Low-Quality stocks have now passed, and we recommend that investors own High-Quality stocks instead,” she explained.

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While high-quality shares still lag low-quality shares year-to-date, Subramanian said that the bank anticipates a downturn, during which quality factors typically outperform.

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In order to find stocks with the highest quality rating of A+ within the S&P 500, Trade Algo screened through the S&P 500 data to find stocks that matched this quality rating. Among the factors that S&P uses to determine its quality rankings is the consistency of earnings growth and dividend growth over the past ten years, as well as dividend yields.  

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Find out which stocks are the best in the S&P 500.

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Semiconductor maker Applied Materials appeared on the list, with its shares jumping almost 20% in 2023 as a result. There has, however, been a decline of 13.5% in the stock price in the last 12 months. Analysts, however, still regard the stock as a buy, with 70% of those covering it giving it a buy rating and anticipating an average upside of 12.24%. 

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MasterCard and Visa, two companies that specialize in digital payments, made the list as well. Visa stocks are up nearly 5% this year, and analysts predict they will rise an estimated 20.2% within the next 12 months. In fact, 35 out of 40 analysts who cover Visa rate it as a buy.

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According to Goldman Sachs, MasterCard is also one of the most preferred credit cards among both mutual funds and hedge funds. There is an average price target of $424.49 assigned to the stock, which implies a 20% increase in value from its closing price on Wednesday. During the past 12 months, the company's shares have increased by almost 3%. 

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The stock of Domino's Pizza has an A+ rating in the S&P 500, which is another stock with an A+ rating. There has been a drop of 12.3% in its share price in 2023 after its quarterly sales and revenue failed to meet analysts' expectations. Even so, analysts still seem to be optimistic about the stock, with 13 out of 33 analysts rating it as a buy on their lists. A lot of analysts believe that the company's new potato tot offering could also increase sales as a result of its new potato tots offering. 

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As part of the S&P 500, several retailers specializing in home improvement were also selected as among the crème de la crème of the industry. After the company's fourth-quarter earnings fell short of Wall Street's expectations, Home Depot shares have fallen 7.7% this year. However, analysts predict that it will rally again in the next 12 months - with an upside target of 12.3% in the next 12 months. 

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While Lowe's shares have also declined this year, falling 2.5%, many analysts still believe that it is a good buy at the moment. In addition to Bank of America's investment thesis regarding Lowe's' ability to 'close the gap' when it comes to same-store sales growth and operating margins, this concept is also a key element of its investment thesis," according to the company.