The S&P 500 won't deliver great returns this year as volatility persists, but these stocks could do better, BofA analyst says

• Investors will be shocked by the volatility in stocks in 2022, Bank of America's Savita Subramanian said.
• The analyst believes the S&P 500 won't deliver great returns this year, as the Fed hikes interest rates.

Investors shouldn't expect the S&P 500 to deliver good gains this year, and should brace for stocks to keep whipsawing, according to Bank of America's Savita Subramanian.

"It's going to be a year where we are shocked by the volatility," she told CNBC's "Fast Money" on Tuesday.

US stock markets saw sharp intraday reversals in January, and on a single day the Dow Jones Industrial Average swung more than 1,000 points. Investors were unsettled by the prospect of the Federal Reserve hiking interest rates and cutting off support for the economy.

January ended as the worst month since March 2020 for the tech-heavy Nasdaq and the S&P 500, as investors sold off stocks that tend to underperform when inflation and interest rates rise.

While February has been upbeat for US stocks so far, Subramanian sounded a note of caution for investors.

"I just don't think it's time to buy the S&P 500 wholesale. I don't think this is going to be a year where the S&P turns in great returns," Bank of America's US head of equity and quantitative research said.

The bank's target for the S&P 500 is 4,600, about 5% below its record high close of just above 4,796 on January 3, before the sell-off. The index was trading near 4,567 at last check Wednesday.

"Between today and year-end, we're going to hit that target multiple times, and we're going to see some big swings in the market," Subramanian said.

But in the calm after the volatility, investors have an opportunity to search out stocks that can handle the bumps ahead.

"It's time to sift through all the rubble and look for good, high-quality companies with free cash flow," the analyst said.

She said it could be a better environment for cash-rich corporates, like healthcare companies and financial stocks. "I think energy still works. It's still very underweight."

"That would be my mantra for the year: Just use volatility as a buying opportunity for high-quality free cash flow yielders," Subramanian said.

As the Fed prepares to hike rates, markets are recalibrating their expectations, as yields on cash will probably rise from zero to near 2% by the end of 2022, she explained.

Bank of America expects seven interest-rate increases from the Fed this year. If that happens, those hikes will spark volatility, Subramanian believes. "I don't think the market is pricing that in," she said.

Growth stocks — the tech sector names that led markets higher in the easy money era — will bear the brunt of the pain, she warned.

"What gets hurt are some of these longer-duration growth stocks, in an environment where discount rates are rising. And that's where I think the S&P might be in trouble — because that's a bigger weight in the benchmark."