The AI trade has powered this market for the better part of two years, but the past couple of weeks have served as a reminder that no trend moves in a straight line. As volatility has crept back into high-flying AI and technology names, a quiet rotation has been underway beneath the surface. Capital has begun flowing toward areas of the market largely ignored during the AI frenzy, and the relative strength emerging in certain corners warrants close attention.
If the AI sell-off deepens, history suggests and has often shown that money does not simply leave the market entirely. It rotates. It moves toward sectors with defensive characteristics, durable earnings, reliable dividends, and businesses that do not live or die by the next GPU shipment.
Five areas in particular have been displaying notable relative strength or defensive qualities of late, and within each, certain best-in-class names have been leading the way. For investors looking to play defense without leaving the market entirely, or to perhaps slightly rotate out of high-growth AI-related names into more defensive corners, these might be the places to watch.
Biotech: The Breakout Sector
The iShares Biotechnology ETF (NASDAQ: IBB) has quietly become one of the strongest stories in the market over the past week. The fund recently hit an all-time high and is up nearly 10% over just the past 30 days, a period during which much of the AI complex struggled. After years of underperformance, biotech is finally breaking out, supported by a resilient funding environment, a reopening IPO window, and renewed M&A interest from big pharma. IBB is up close to 11% year to date and carries an aggregate Moderate Buy rating.
Technically, few sectors look as bullish as the biotechnology space. The sector ETF broke out above a multi-year resistance level last week and closed the week up almost 8%. That five-day green surge higher last week was a clear sign of sector rotation and upward momentum, coming at a time when many leading AI-related growth names struggled.
The standout individual name within the space has been Eli Lilly (NYSE: LLY). The pharmaceutical giant surged more than 6% in a single session on June 26 and is now trading near all-time highs, up 12.2% year to date. Lilly's dominance in the GLP-1 weight-loss and diabetes market continues to drive enormous growth, with Medicare obesity drug coverage emerging as a fresh catalyst. With a TradeSmithGreen Zone health reading, a low beta of 0.53, and a consensus Moderate Buy rating, Lilly offers defensive growth at a time when growth is getting harder to find elsewhere.
Industrials: Strength at New Highs
The Industrial Select Sector SPDR Fund (NYSEARCA: XLI) recently hit a fresh 52-week high, a clear sign of relative strength as the AI names wobbled. Up nearly 17% year to date, the industrial sector has benefited from reshoring trends, defense spending, aerospace demand, and the physical buildout that even the AI theme ultimately depends on. With a beta near 1.0 and an aggregate Moderate Buy rating, XLI offers exposure to the real economy rather than the speculative end of it. And from a technical perspective, as long as the XLI ETF can sustain a move above the high $170s and ultimately $180, its relative strength and bullish positioning will remain intact.
GE Aerospace (NYSE: GE) has been a clear leader in the sector. The stock is up almost 20% year to date, trading near its highs, supported by a massive $170 billion services backlog and surging demand for jet engines and aftermarket services. GE has transformed from what many once considered a broken industrial conglomerate into one of the most impressive turnaround stories on Wall Street.
Utilities: The Defensive Power Play
The Utilities Select Sector SPDR Fund (NYSEARCA: XLU) is the classic defensive sector, and it carries an added twist in 2026: the AI power demand story. With a beta of just 0.58 and a 2.58% dividend yield, utilities offer stability and income. At the same time, the surge in electricity demand from data centers has given the sector a growth angle it has historically lacked. XLU is up almost 8.2% year to date and rated Moderate Buy in aggregate. The sector ETF also possesses a bullish look on the chart, with consecutive higher lows and higher highs forming over the past year, a classic uptrending bullish formation.
NextEra Energy (NYSE: NEE) is arguably the best-in-class name here. As the largest holding in XLU and a leader in both regulated utility operations and renewable generation, NextEra sits at the intersection of defensive income and AI-driven power demand. The stock scored in the 96th percentile of MarketBeat's MarketRank, ranking 6th out of 96 utilities, and is the only name in this piece with double-digit implied upside to its consensus price target of $99.86, roughly 13% above current levels. With a 2.82% yield, NextEra offers a rare blend of defense, income, and growth.
Consumer Staples: The Ultimate Safe Haven
When investors get nervous, consumer staples are where they often tend to hide. The Consumer Staples Select Sector SPDR Fund (NYSEARCA: XLP) holds companies that sell products people buy regardless of the economic backdrop: food, beverages, household goods, and personal care products. With a beta of just 0.47, the lowest of any sector ETF here, and a 2.59% yield, XLP is the definition of defensive. It is close to 9% year to date, with an aggregate Moderate Buy rating.
Coca-Cola (NYSE: KO) stands out as the leader in the sector. The beverage giant is up almost 18% year to date, one of the strongest performances among names in this piece, and recently traded near all-time highs. With a beta of just 0.35, a Dividend King status reflecting more than six decades of consecutive dividend increases, and a 92nd percentile MarketRank score, Coca-Cola is the textbook defensive holding. Its financial health has sat in the Green Zone for over two months, and its steady, recession-resistant business model is exactly what investors gravitate toward when the speculative trades unwind.
Dividend Quality: A One-Stop Defensive Vehicle
Finally, the Schwab US Dividend Equity ETF (NYSEARCA: SCHD) deserves a place on this list as a diversified, all-in-one defensive vehicle. Unlike the sector-specific funds above, SCHD screens for high-quality, dividend-paying U.S. companies across the market and tracks the Dow Jones U.S. Dividend 100 Index. With a rock-bottom 0.06% expense ratio, a 3.24% dividend yield, the highest of any fund here, and a beta of 0.67, it offers broad exposure to exactly the kind of durable, cash-generative businesses that hold up best when and if the AI trade wobbles. SCHD is up close to 17% year to date and has an aggregate rating of Moderate Buy.
Because SCHD spreads its holdings across financials, healthcare, energy, staples, and industrials, it captures much of the defensive rotation theme in a single ticker. For investors who want to play defense without picking individual sectors or names, it is one of the cleanest options available.
A Compelling Place to Hide If the Sell-Off Continues
None of this is to say the AI trade is over. It remains one of the most powerful secular themes in market history. But after an extraordinary run, some rotation and consolidation would be entirely healthy, and the relative strength showing up in biotech, industrials, utilities, staples, and high-quality dividend payers suggests smart money is already positioning for that possibility.
For investors looking to stay invested while reducing exposure to the most stretched corners of the market, these five areas, and the best-in-class names leading them, offer a compelling place to hide if the AI sell-off has further to run.
The article "5 Places Investors Can Hide If the AI Trade Keeps Cracking" first appeared on MarketBeat.
