Why the stock market's biggest laggards might be your best defense against a summer selloff

By Joseph Adinolfi

After a long stretch of lackluster performance, low-volatility names are suddenly outperforming

Low-volatility stocks are having a moment.

An uncomfortable game of musical chairs is playing out on Wall Street. Investors are dumping shares of the best-performing stocks - mainly semiconductor names - and shifting their money into financials, healthcare and consumer staples.

The sudden change in leadership is giving some of the worst-performing stocks in the S&P 500 SPX a new lease on life. For years, stocks associated with the low-volatility factor have lagged other factors like growth, quality and momentum.

But recently, this trend has been flipped on its head. During the two weeks through Friday, the Invesco S&P 500 Low Volatility ETF SPLV bested the Invesco S&P 500 Momentum ETF SPMO by 10.7 percentage points - the widest two-week margin on record since the October 2015 launch of the momentum exchange-traded fund, according to Dow Jones Market Data.

This represents a sharp departure from the historical trend. Over the past decade, the low-volatility ETF has tallied a fraction of the returns seen by the momentum ETF.

Invesco offers a suite of 28 factor and core equity ETFs, a representative of the company told MarketWatch. According to a MarketWatch analysis, the low-volatility ETF has underperformed many other members of this group.

The Invesco S&P 500 Low Volatility ETF holds the 100 stocks among the S&P 500 that have shown the least price volatility during the preceding 12 months. It is reconstituted quarterly. The portfolio is weighted based on the inverse of each stock's price volatility, according to the fund's prospectus.

The current rotation away from 2026's top-performing names has helped keep the S&P 500 stuck in a narrow trading range over the past month, as demand for the most volatile stocks has dimmed, said James St. Aubin, chief investment officer and portfolio manager at Sierra Investment Management. After such a strong stretch, investors appear to be back in bargain-hunting mode.

"Investors can leave the market altogether, or they can find other opportunities, and that's certainly what we're seeing right now," St. Aubin told MarketWatch.

While the low-volatility factor has performed well recently, the magnitude of the performance gap is owed more to the selloff in momentum than to newfound enthusiasm for shares of staid purveyors of consumer packaged goods and insurance.

Even so, after such a long stretch of underperformance, it seems the low-volatility factor is having a moment, said Melissa Brown, global head of investment-decision research at SimCorp, during an interview with MarketWatch.

"It seems like there's a shift in the collective mindset of investors," Brown said. "After high volatility and momentum did so well for so long - and not just in the U.S., but around the world - something is changing."

How long this will persist remains to be seen. But low-volatility names could be poised to outperform for at least the next few months, professional money managers told MarketWatch.

As MarketWatch recently reported, July has already been a difficult month for momentum stocks, as the tremors that started in June have continued to intensify. Through Tuesday's close, a Goldman Sachs basket of high-beta momentum stocks tallied its biggest five-session selloff since 2020.

Stocks slumped on Wednesday after the conflict in Iran heated up again. During a press conference on the sidelines of a NATO summit in Turkey, President Donald Trump said he believed the tenuous cease-fire between the U.S. and Iran was likely over. Weakness has so far been broad-based. Energy stocks were climbing, and strong gains for Broadcom's stock (AVGO) helped lift the S&P 500 information technology index into the green, but virtually every other corner of the market was selling off - including other semiconductor names.

"July is a notoriously weak month for the momentum factor, and I think many investors may be looking to de-risk - but stay invested - as we draw closer to the midterms," Mike Zaccardi, a financial writer with a large social-media following, told MarketWatch.

Another thing to keep in mind: During midterm-election years, the period from August through October has historically been one of the weakest stretches of the entire four-year election cycle for the broader market, Zaccardi said.

As seasonal patterns collide with the worries about the war and doubts about the durability of the artificial-intelligence trade, investors may seek succor in shares of companies with stable cash flows and more attractive valuations instead of pulling their money from the equity market entirely, Razmig Der-Tavitian, chief investment officer at Evolve Private Wealth, said during an interview with MarketWatch.

"Companies that are trading at attractive valuations with real cash flows are going to be rewarded if there is an unwind in some of this AI exuberance," Der-Tavitian said.

Philip van Doorn and Michael DeStefano contributed.

-Joseph Adinolfi

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07-08-26 1102ET