Wells Fargo's top ideas to help cushion your portfolio from rocky markets

CNBC

11-06-2025

With market volatility expected to continue through the summer, investors should consider cushioning their portfolios with income-generating assets, Wells Fargo said in its mid-year outlook. In fact, income generation is one of the firm's top five portfolio ideas for the rest of 2025. While the Treasury market has been rocky lately, fixed-income assets are offering a steady stream of cash flow, said Tracie McMillion, head of Wells Fargo's global asset allocation strategy. "Cash coming into a portfolio can be very important to income investors in particular, but it provides all investors with optionality," she said during a panel discussion Tuesday on the bank's investment outlook. 'Fireworks' this summer Wells Fargo expects limited upside for stocks this year and a recovery in 2026 , with the S & P 500 reaching 6,500 by the end of 2026. However, the path from here will be choppy and will likely include a 5% to 10% pullback due to several headwinds this summer, according to the firm. "There's a lot of news events and pretty material market-moving news events that all are going to converge in the months of July and August," said Darrell Cronk, president of Wells Fargo Investment Institute and chief investment officer for Wells Fargo's wealth and management division. "That's going to lead to, no pun intended, some fireworks that we think markets are going to have to digest." Notably, the pause on most of President Donald Trump's reciprocal tariffs is due to expire in July, with China's pause lifting in August. In addition, Trump has said he wants his " big, beautiful bill " of tax cuts on his desk by July 1. The legislation, which the Congressional Budget Office estimates will add $2.4 trillion to the deficit ovet the next 10 years, was passed by the House last month and is now before the Senate. Finding income To generate cash flow, Wells Fargo prefers intermediate-term fixed income assets, since short- and long-term bonds could be hurt by both future Federal Reserve monetary policy as well as fiscal policy, McMillion said. "As the yields on shorter maturities may fall faster than on longer maturities, we believe the best opportunities are in the intermediate space (five- to seven-year maturities), offering attractive income and exposing investors to less volatility than longer-dated maturities," she wrote in the outlook. One area the bank likes is investment-grade corporate bonds. For example, iShares 5-10 Year Investment Grade Corporate Bond ETF has a 30-day SEC yield of 5.32% and an expense ratio of 0.04%. Within investment-grade corporates, it favors telecom issuers, financials and utilities. Wells Fargo also likes residential mortgage-backed securities and asset-backed securities. Municipal bonds also present a good opportunity for investors, particularly general obligation bonds and essential service revenue bonds, said Brian Rehling, head of global fixed income strategy. VTEB YTD mountain Vanguard Tax-Exempt Bond ETF year to date For one, yields are attractive, especially when their tax advantage is taken into account. Income on munis is free of federal tax and, if the bondholder lives in the same state where the bond was issued, exempt from state tax, too. For example, the Bloomberg Municipal bond index currently yields 4.05%. Assuming the highest tax-bracket of 37%, that implies a taxable equivalent yield of about 6.43%, Wells Fargo said. Plus, while there has been some concern that the muni tax exemption could be eliminated or cut back as Congress looks for ways to offset the Trump administration's proposed tax cuts, Wells Fargo believes that is "extraordinarily unlikely." "[It] actually offers an opportunity for investors to get in at a little bit more attractive valuations," Rehling said. Diversifying beyond bonds Investors may also consider diversifying into other asset classes, like dividend stocks in some of the sectors Wells Fargo favors, McMillion said. Wells Fargo's most recommended equity sector is energy, which tends to pay a lot of income. For instance, the Energy Select Sector SPDR Fund has a 30-day SEC yield of 3.31% and an expense ratio of 0.08%. Among the other sectors the firm is favorable on are utilities and financials, which also pay high dividends. XLE YTD mountain Energy Select Sector SPDR Fund year to date Within energy and utilities, midstream energy, electric utilities and independent power and renewable electric producers "can benefit from strong fundamental positioning while leveraging secular growth in power demand," Wells Fargo said in its outlook. "The leaders in these industries own and operate some of the most difficult-to-replicate assets on the planet, including long interstate pipelines and nuclear power plants," Wells Fargo said. "These companies do not have meaningful direct exposure to commodity prices, but rather, benefit from the long-term growth in energy demand from data centers, electrification and reshoring of specific industries." Lastly, direct lending, a subset of private debt, offers the most attractive yields and can be a good way to add income for qualified investors who meet financial thresholds, McMillion said. The yield on the Cliffwater Direct Lending Index , an asset-weighted index of approximately 14,800 directly originated middle-market loans, was 11% as of December 31, 2024, she noted.