By Jacob Sonenshine

The market has staged an impressive rebound, but is in for more volatility. Investors can protect themselves with certain high-quality stocks.

As of Friday's close, the S&P 500 was up 4.8% from the low it reached on Nov. 20 and within 0.6% of its record high at 6890. The index was down as much as 0.7% on Monday morning.

The overarching up-and-down dynamic starts with the fact that sellers have been coming in near the market's highs to knock stock prices lower because investors and traders know that the more artificial-intelligence spending happens today, the greater the likelihood that the spending will collapse tomorrow. That would be a problem for technology stocks.

Buyers come in to prop prices up when they fall too much because so far, there are no signs of a plunge in AI spending.

That is causing volatility. The Cboe Volatility Index, which shows the magnitude of expected swings in stock prices, hit 18 early Monday, down from about 26 in mid November but above its low for the year of about 14. In the past month, when it has dropped, it has stayed above 16, showing that the market is still hanging onto some uncertainty about the direction of stock prices

The point is that, while any optimist can conceive of a scenario in which artificial intelligence doesn't turn out to have been a bubble, the market will likely trade with especially high volatility for the next few months. The next update on AI spending won't arrive until companies disclose their fourth-quarter results in early 2026, so uncertainty will reign.

That means it makes sense to have at least some of one's portfolio in high-quality stocks.

Quality names are defined in many ways, but they have a few common features. They have consistent earnings either because they are highly competitive in their businesses or are in industries where demand is stable regardless of economic conditions. Quality companies produce higher returns on equity than most businesses do, and they have less debt.

The result is that when stock prices drop harshly, these stocks often don't drop as much. They offer the potential for gains when the market is rising.

Trivariate Research's Adam Parker screened for stocks that check those boxes, but also have "betas," a measure of volatility, of less than 1.1. Any beta higher than 1 means a stock is more volatile than the S&P 500, while betas of less than 1 are less wild. That means the names on Parker's list are either only as volatile as the broader market, or more stable. Parker, founder of the research shop, only included stocks that were up at least 5% for the year as of the close on Friday. The idea is that the broader market is up, so any stock that hasn't risen at least a bit might have pressing business-specific problems.

Most stocks that made it through Parker's screen have outperformed the S&P 500, on average, on days when the index is down this year. But Barron's wanted to find only the ones that fit that description.

Many of those stocks are household names. According to Dow Jones Market Data, they include Microsoft, Cisco Systems, Eli Lilly, Exxon Mobil, Walmart, TJX, Charles Schwab, Monster Beverage, and Johnson & Johnson. Also on the list are the drug companies Merck and Gilead Sciences; Medtronic, which makes pacemakers; HCA Healthcare, a hospital operator; the drug distributor McKesson's; Duke Energy, a utility; and Parker-Hannifin, maker of industrial components.

Many of those stocks are in "defensive," or safe, sectors: healthcare, utilities, and consumer staples, which historically are less volatile.

Rather than making a big bet on one of those companies, or a few of them, it makes more sense to buy more or less equal amounts of all of those stocks. That eliminates the risk of having too much exposure if one of those businesses runs into trouble. In aggregate, this basket of stocks is likely to outperform the S&P 500 if it drops, but also participate in the upside as it rises.

It is time to start accounting for risk to the market. This is a way to do that.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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December 01, 2025 13:23 ET (18:23 GMT)

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