Investors are shifting money into stocks with defensive and high-quality characteristics
Investors were spooked by the tech selloff in October.
U.S. stocks saw a strong reversal in fortunes in October, as worries about dwindling free cash flows and rising borrowing costs threw a wrench into the artificial-intelligence trade.
Tech stocks were punished, with the S&P 500's information-technology sector XX:SP500.45 snapping back-to-back monthly gains to drop 6.8% for its worst month since March 2025, FactSet data showed. Investors - spooked by fears that companies may not deliver the payoff they had expected from AI despite continuing to pour money into building data centers - leaned into traditionally more defensive parts of the equities market. They're also eyeing high-quality stocks to help mitigate sudden tech blows.
Friday's clobbering of the Invesco S&P 500 Momentum ETF SPMO, which tracks stocks in the U.S. large-cap equities index that have a high momentum score and whose portfolio is heavily weighted toward tech, left the exchange-traded fund with a 10.1% loss in October. The iShares MSCI USA Momentum Factor ETF MTUM, which seeks to capture market trends by investing in U.S. stocks with strong recent performance, booked a similar drop of 10.5% in October, according to FactSet data.
"We're buying quality," said Jeff Buchbinder, chief equity strategist at LPL Financial, in a phone interview. "When you buy quality products, you are getting a little bit of a value tilt, and you're getting a little bit of underweight to the AI trade, particularly to the lower-quality segment of the AI trade."
Marta Norton, Empower's chief investment strategist, also pointed to stocks with quality characteristics as desirable in the current environment, citing their "lower levels of debt, consistent earnings streams and a measure of growth embedded in the revenue profile."
While tech's struggles in October dragged the S&P 500 SPX and Nasdaq Composite Index COMP into the red, high-quality stocks generally appeared to hold up amid the AI-related carnage.
Take the iShares MSCI USA Quality Factor ETF QUAL, which aims to invest in U.S. stocks with stable earnings and low debt. The fund ended October with a slight 0.1% gain, according to FactSet data. By contrast, the tech-heavy Nasdaq fell 5.3% in October, cementing its worst monthly performance since March 2025, according to Dow Jones Market Data.
As the AI trade's recent comeback violently reversed in October, investors have sought shelter in Treasury bonds while also taking cover in traditionally defensive stock-market sectors, like healthcare XX:SP500.35, utilities XX:SP500.55 and consumer staples XX:SP500.30.
The State Street Consumer Staples Select Sector SPDR ETF XLP, the State Street Utilities Select Sector SPDR ETF XLU and the State Street Health Care Select Sector SPDR ETF XLV all saw enormous rallies in October.
The consumer staples ETF, whose top three holdings as of Thursday included Walmart (WMT), Costco Wholesale (COST) and Procter & Gamble Co. (PG), soared 10.9% in October. That huge gain left the State Street Consumer Staples Select Sector SPDR ETF with its largest monthly gain ever since it began trading in 1998, according to Dow Jones Market Data.
While consumers still appear to be spending despite sticky inflation, purchases of discretionary items risk falling off if the stock market experiences a big drawdown that makes investors worried about a drop in their wealth, Russell Price, chief economist at Ameriprise Financial, told MarketWatch by phone. But consumer staples tend to fare relatively well when the economy slows, as people continue to shop for items like soap, toothpaste and shampoo.
Consumer staples tend to be "a safer place to be within the equity market," said Empower's Norton, "as there's just not a whole lot of earnings volatility there." But she cautioned that, at this point, the consumer-staples sector appears "overvalued" following its recent surge.
The S&P 500's consumer-staples sector has gained almost 16% this year after its October spike, according to FactSet data.
Still, the index's tech sector has seen an even bigger gain so far in 2026 - around 19% - despite fears over the AI trade as chip stocks sold off in October.
The PHLX Semiconductor Index SOX plunged more than 15% in October, with Intel's shares (INTC) plummeting 28.6% on Friday alone after the company's quarterly earnings report disappointed investors.
Big Tech stocks also fell Friday, as investors digested Amazon.com's (AMZN) quarterly earning results. The Roundhill Magnificent Seven ETF MAGS - whose holdings include seven Big Tech stocks including Amazon, Nvidia (NVDA), Google parent Alphabet (GOOG) (GOOGL), Microsoft (MSFT), Facebook parent Meta Platforms (META) and Tesla (TSLA) - dropped 4.5% in October, according to FactSet.
Hyperscalers in that group are at the center of "the AI storm." But they have appreciated by less than hot chip stocks, making them less vulnerable to a pullback, according to Norton.
The market seems to be "calling the wrestling match after the first takedown instead of waiting to see how it plays out over time," she said. "I don't think we know who the winners and losers are because we don't know exactly how customers and enterprises are going to change their behavior and interact with AI."
While the U.S. equities market's stumble in October was largely triggered by a selloff in the technology sector and Big Tech due to AI anxiety, an equal-weight version of the S&P 500 pulled off a gain as the average stock appeared to do well week after week.
The Invesco S&P 500 Equal Weight ETF RSP rallied almost 5% in October, ending Friday with a fourth straight week of gains, according to FactSet data. By contrast, the S&P 500 booked a monthly loss of 0.9%, falling for a third straight week to reduce its 2026 gain to 10.7%, according to Dow Jones Market Data.
-Christine Idzelis