Defensive Stocks Are Outperforming Wall Street's Favorites. Can the Rally Last?
For much of the past 18 months, investors couldn't get enough of fast-growing tech stocks. But October has brought a change in appetite, with utilities, energy, health care, and other defensive sectors outperforming some of Wall Street's biggest winners.
The market's favorites are changing
From the April 2025 market low through September 2026, high-beta S&P 500 stocks outperformed their less volatile peers by 121 percentage points. Beta measures how much a stock moves relative to the broader market.
That trend has reversed over the past four weeks, with low-volatility stocks outperforming their riskier counterparts by 13 percentage points.
The shift has also benefited the Dividend Aristocrats and Pure Value indexes, which had struggled to keep up during the tech rally.
Companies such as Berkshire Hathaway, Duke Energy, Aflac, Chevron, Procter & Gamble, and Costco are among the more defensive names attracting attention.
Defensive sectors take the lead
The rotation is becoming increasingly visible across sectors. Energy stocks gained roughly 20% over the three months through Oct. 23, making them the market's strongest performers, according to Lighthouse Canton. Industrials, meanwhile, fell around 10%.
Health care followed with gains of about 10%, while technology rose 5% and consumer staples added 4%. Semiconductors, one of the rally's biggest drivers, declined roughly 4%.
Energy Leads While Industrials and Chips Lag
Three-month sector returns through Oct. 23, 2026, %
Bar chart. Three-Month Return (%). Energy: Three-Month Return (%) 20%. Health Care: Three-Month Return (%) 10%. Technology: Three-Month Return (%) 5%. Consumer Staples: Three-Month Return (%) 4%. Semiconductors: Three-Month Return (%) -4%. Industrials: Three-Month Return (%) -10%.
The difference became even more apparent during the week ending Oct. 16, when technology stocks dropped around 8% while energy and consumer staples each gained approximately 5%.
MarketBeat's Ryan Hasson also highlighted utilities, staples, and energy as market leaders after the Nasdaq-100 ETF briefly reached a record high before falling back below its breakout level.
Consumer staples, which typically move less than half as much as the broader market, also recovered above their 200-day moving average.
Tech's crowded trade starts unwinding
Much of the reversal comes down to how heavily investors had piled into the same stocks.
Between Oct. 6 and Oct. 22, two major US momentum funds lost roughly 9% to 11%. The S&P 500 fell less than 2% during that period, while its equal-weighted version gained ground.
Momentum investing had become increasingly tied to semiconductors, with the correlation between the two reaching 0.95 in August.
Bank of America's fund manager survey identified global semiconductor stocks as the market's most crowded trade for four consecutive months.
Goldman Sachs also reported the fastest hedge fund reduction in technology exposure since it began tracking the data in 2016.
Higher borrowing costs and geopolitical tensions added to the pressure. The 10-year Treasury yield climbed above 5.1% in September, while oil approached $101 a barrel amid tensions involving Iran.
The rally has a breadth problem
Another warning sign is emerging beneath the major indexes. On Oct. 27, the S&P 500 gained roughly 0.5%, but only 210 of its companies finished higher. Its equal-weighted counterpart actually declined.
Only 210 Stocks Carried the Index Higher
S&P 500 members that finished higher vs. not on Oct. 27, 2026
Pie chart. Count. Finished higher: Count of Companies 210. Did not finish higher: Count of Companies 293.
BTIG chief market technician Jonathan Krinsky noted that the index and market breadth have moved in opposite directions on roughly one-third of trading days this year.
He's also skeptical that the upcoming midterm elections will deliver the broad market rally some investors expect.
Even falling Treasury yields and oil prices on Oct. 27 failed to lift participation beyond a narrow group of technology stocks.
What investors should watch
The shift toward dividend-paying and low-volatility stocks could offer investors a way to reduce exposure to crowded AI trades without leaving equities altogether.
History offers some support. Following the 1998 financial crisis and the 2020 pandemic crash, riskier stocks led for roughly 20 months before more traditional sectors recovered.
Low-volatility stocks also delivered strong long-term returns between 1998 and 2003, despite the technology boom in between.
Still, the rotation isn't guaranteed to continue. Strong semiconductor earnings in November could revive momentum, particularly after this month's selloff.
For now, Wall Street's biggest change isn't that investors have stopped chasing returns. It's that they're starting to look beyond the stocks that delivered them.
