3 Smart Defensive Stocks for an Uneasy Market

Key Points

• Despite new market highs, recession risks remain elevated due to weakening consumer credit and signs of job market stress.
• Procter & Gamble and Johnson & Johnson offer stable dividends, strong balance sheets, and catalysts that could provide upside in a downturn.
• A rotation away from AI and into Dow components could make the DIA ETF a compelling defensive play for 2025.

At one point in early November, the Dow Jones Industrial Average (DJIA) briefly topped 48,000 for the first time ever. At different times in 2025, the NASDAQ and S&P 500 have made new all-time highs (ATHs). Despite sharp price swings, it's been a solid year to own stocks.

Yet many economists, analysts, and investors remain uneasy. The market appears priced for perfection—but recession risks are not priced in.

Even with broad gains, some skepticism persists. The Magnificent 7 trade may have cooled off, but the market is clearly being lifted by a narrow group of names, mostly tied to the AI boom.

The K-Shaped Economy Concern

Current economic commentary focuses on a K-shaped recovery. Higher-income consumers are navigating inflation of around 3%—still above the Federal Reserve’s informal 2% target but manageable for affluent households.

But lower-income consumers have been under pressure for several years. There’s increasing evidence in credit defaults, delinquent auto loans, and more recently, an uptick in foreclosures, which suggests this problem is getting worse. The labor market had been the economy’s strongest pillar, but even that is starting to show signs of strain. 

JPMorgan Chase & Co. NYSE: JPM recently lowered its estimation of the probability of a recession from 60% to 40%, due to the recent de-escalation of trade tensions. But that’s still a significant risk.

Market Breadth Remains Narrow as Investors Chase Mega-Caps

Recent data from Charles Schwab shows the percentage of S&P 500, NASDAQ, and Russell 2000 stocks trading above their 200-day moving average was slightly above 50%. That’s historically low market breadth, which is adding to investors' concerns.

This isn’t a redux of 2021, when investors piled into unprofitable SPACs in hopes of becoming a millionaire. In many cases, the market froth is coming from mega-cap stocks that have plenty of cash on the balance sheet. Still, investors have a sense that many of these stocks are simply overvalued.

So what’s an investor to do? Here are three stocks that provide the opportunity for an asymmetric return in the current uneasy market. 

Procter & Gamble Has More Than a Dividend to Like

Procter & Gamble Co. NYSE: PG is part of the exclusive Dividend Kings club, meaning the company has increased its dividend for at least 50 consecutive years—70 years in the case of PG, which is why it’s a staple in the portfolio of many income-oriented investors.

The 2.8% dividend yield could look even better if rates fall. Plus, 2025 brings potential growth—the $171.53 price target implies 17% upside.

It's unclear how the company’s proposed acquisition of Kenvue NYSE: KVUE would impact the company’s earnings.

However, if the deal goes through and the Tylenol controversy abates, there would almost certainly be a small earnings per share (EPS) dilution in the first year.

After that, the dilution would likely turn into a boost in EPS due to cost synergies with the two companies.

Johnson & Johnson Doubles Down on Medtech and Oncology Growth

The next company on this list is Johnson & Johnson NYSE: JNJ, the company that spun off Kenvue in 2023 with the intent to lean into its medtech and pharmaceutical businesses.

Its recent $3.5 billion acquisition of Haida Therapeutics is one example of the new company’s plans.

The all-cash deal gives JNJ access to the clinical-stage company’s HLD-0915 drug candidate.

This is a once-daily oral prostate cancer medication that received fast-track designation from the U.S Food & Drug Administration (FDA).

This will be a material addition to the company's oncology pipeline, which should make JNJ stock more appealing to growth-oriented investors.

The DIA ETF Could Benefit From a Flight to Safety

Over the past five years, many investors embraced a passive "SPY and chill" strategy, meaning investing in the SPDR S&P 500 ETF Trust NYSEARCA: SPY.

The SPY may still be a good investment, but with potential AI overexuberance, it may also be time to consider the SPDR Dow Jones Industrial Average ETF Trust NYSEARCA: DIA.

If concerns over an AI bubble take hold, there is likely to be a strong rotation into stocks that make up the Dow 30. That would make the DIA ETF a solid asymmetric investment to capture this rotation play.

As of this writing, the DIA ETF has only about 37% institutional ownership. However, it’s seen more buying than selling in seven of the last eight quarters, hinting that institutions are beginning to build a hedge against a possible slowdown in the tech trade.