How to Identify Quality Stocks During a Market Pullback

Market downturns as discussed in the stock market next week post are a little depressing, making investors believe there are no opportunities. But when the dust settles by 2026, some stocks will have enjoyed massive gains.

Sure, stock market experts are calling the bottom right now, but this is highly unlikely. This is an economic transition period and we’ll likely see more pain for consumers and companies as international trade is tattered. The experts feel President Trump will withdraw the tariffs and the status quo will remain.

In reality, the friction/retaliation will increase over the next 3 months resulting in huge pain, after which nation’s leaders will agree to modify their own tariff regime. Overall however, with President Trump’s insistence and improving proof of performance, US companies will see improvement. The quest for investors like yourself is identifying those listed companies that are at bottom, only to rise fast over the next year.

Overall market performance is expected to be mild, which is why stock picking is the flavor of the day. If you’re a gambler, you might as well do your stock picking correctly, and understand why you should bail on the stocks you have now. If those stocks are viable for the recovery, you might want to hang onto them.  Sometimes patience really is a virtue (spoken from experience).

The Bottom Will Come, so You Have Some Time

Like everyone, you’re reviewing your equities portfolio as its value on paper plummets, so why not flip the problem and find some great stocks at a buy the dip price?  The tariffs are the biggest factor right now, suppressing valuations and generally depressing the stock market. But get past this 2025 transition challenge, and some US sectors will shine bright. And some specific stocks will outperform everything. Your challenge is to find them.

On the positive side, assuming you’re okay about investing in US stocks, is that over the next 2 to 5 years, President Trump’s rejuvenation of America will pay off. Lower taxes is a big incentive for all businesses. And import tariffs are drawing in big foreign direct investment, improving US GDP/manufacturing, cutting the US trade deficit, and giving American companies (including small companies) some protection so they can get rolling for the 5 year forecast period.

Your quest is to find those sectors and stocks that are underpriced now (low P/E ratios) and will likely rebound the strongest as the tariff challenge unwinds. Let’s get past this period of turmoil, think long-term, and investigate the best sectors first. Because stocks in bad sectors will be extra challenged to outperform.  Great stocks in great sectors, which are currently unappreciated represent big opportunities for profits or a solid portfolio going forward.

What is Sector Investing?

Sector investing is the practice of investing in a specific facet of the investment economy. Currently there are 11 main sectors to review: Energy, financials, health care, information technology, consumer discretionary, consumer staples, materials, communication services, industrials, utilities and real estate.

Keep in mind, you’re choosing stocks that will excel one year from now, not 2025. Do a search on Google, ChatGPT, or Duckduckgo for ideas on what might be the best stocks for 2026.  You’re looking for threads to legitimate contenders such as US companies that will benefit from the pro-US movement (e.g., Google, AT&T, Nvidia, Palantir, General Motors, Schneider Electric).  Don’t forget stocks that will benefit from DOGE cost cutting.

Review what may be the best S&P 500 sectors to focus on over the next 5 years:

1. Industrials (XLI) – The Reshoring Boom

Why Industrials? U.S. is bringing manufacturing back home due to national security, geopolitical risks and supply chain assurance.

• A pro-US investment boost means Capex funds will build factories, infrastructure and more, all increasing employment opportunities and rising wages
• Increased infrastructure spending fuels demand for construction, transportation, and engineering firms.
• AI-powered automation is making U.S. factories more competitive.

Top Stocks to Watch:

✅ Caterpillar (CAT) – Leader in construction and mining equipment, benefiting from infrastructure projects.
✅ General Electric (GE) – Industrial powerhouse in aerospace and energy sectors.
✅ Union Pacific (UNP) – A key rail network benefiting from supply chain shifts.

2. Technology (XLK) – AI, Cloud, and Automation Growth

Why It’s a Winner: Global spending on AI is projected to more than double between 2024 and 2028, with a compound annual growth rate (CAGR) of 29%.

• AI adoption will revolutionize efficiency and automation across industries.
• Cloud computing and cybersecurity are becoming critical infrastructure.
• Semiconductor demand is surging due to AI, automation, and smart devices.

Top Stocks to Watch:

✅ Nvidia (NVDA) – Top company in AI chip development and data center growth.
✅ Microsoft (MSFT) – AI integration into cloud services and enterprise software.
✅ Broadcom (AVGO) – top company for lower-priced semiconductors and networking.

3. Energy (XLE) – U.S. Energy Independence & Renewables Expansion

Why It’s a Winner: The U.S. is becoming the world’s largest energy exporter of LNG (liquefied natural gas) and the US leverages cheap oil from Canada.

• Renewables and nuclear power are gaining government incentives and funding.
• Oil and gas demand remains strong with price spikes likely as supply remains constrained.

Top Stocks to Watch:

✅ ExxonMobil (XOM) – Expanding in both oil production and low-carbon energy solutions.
✅ NextEra Energy (NEE) – A leader in renewable energy and grid modernization.
✅ Cheniere Energy (LNG) – A major player in exporting U.S. natural gas.

4. Financials (XLF) – Rising Interest Rates & Capital Investments

Why It’s a Winner:

• Higher interest rates increase profits for banks and insurers.
• The economic expansion will drive corporate lending, IPOs, and M&A activity.
• Alternative assets (private equity, fintech, blockchain finance) are gaining traction.

Top Stocks to Watch:

✅ JPMorgan Chase (JPM) – The best-positioned big bank benefiting from rate hikes.
✅ BlackRock (BLK) – Dominating asset management and alternative investments.
✅ Berkshire Hathaway (BRK.B) – A diversified financial powerhouse with insurance and industrial holdings.

5. Consumer Discretionary (XLY) – A New Wave of Spending

Why It’s a Winner:

• Wages are rising, supporting consumer spending.
• E-commerce and digital experiences are expanding as AI personalizes shopping.
• Travel, entertainment, and luxury brands are booming post-pandemic.

Top Stocks to Watch:

✅ Amazon (AMZN) – E-commerce dominance and expansion in AI-driven logistics particularly for a growing US retail landscape.
✅ Tesla (TSLA) – EV adoption and energy solutions drive future growth.
✅ Expedia (EXPE) – Benefiting from a hyperfocus on US domestic travel where price is still a concern.

6. Healthcare (XLV) – The Boom in Biotech & Aging Population Care

Why It’s a Winner:

• Aging demographics increase demand for pharmaceuticals, biotech, and medical services.
• AI and robotics are transforming healthcare efficiency.
• Government funding for biotech innovation is rising.

Top Stocks to Watch:

✅ UnitedHealth Group (UNH) – Leading in insurance and digital health solutions.
✅ Eli Lilly (LLY) – Major growth in weight-loss and diabetes drugs.
✅ Vertex Pharmaceuticals (VRTX) – Advancing in genetic therapies.

In your sector analysis, you must distinguish between fundamentally strong companies in rising sectors from those that are declining due to the change in the US and global economy.  This means US stocks, perhaps mid-sized companies or those listed on the Russell 2000 index which have the greatest upside.

Researching the Best Stocks

A little research of financials is wise, and looking for danger signals in stock reports is intelligent investing. Follow this step-by-step guide to identifying great stocks to buy during this market bottoming.

1. Look for Companies with Strong Financials

<p”>When markets decline, financially weak companies struggle the most. To find resilient businesses, focus on these financial indicators:

• Low Debt Levels – Companies with manageable debt are less vulnerable to rising interest rates and economic slowdowns. Look at the <strong”>debt-to-equity ratio (ideally below 1 for most industries).
• Healthy Free Cash Flow (FCF) – Positive and growing free cash flow indicates that a company generates more cash than it spends, which is a strong sign of financial stability.
• Consistent Profitability – Companies with strong operating margins and return on equity (ROE) tend to outperform in the long run.

📊 Example: Microsoft (MSFT) consistently generates high free cash flow and maintains low debt, making it a great long-term hold.

2. Identify Competitive Advantages (Moats)

Even during downturns, businesses with strong competitive advantages (monopolies, branding monopolies) continue to thrive. These include:

• Brand Power – Companies with strong brand recognition tend to hold pricing power. (e.g., Apple, Coca-Cola)
• Network Effects – Businesses that get stronger as more people use them, such as Visa or Meta, tend to be resilient.
• Cost Leadership – Companies that can produce goods more efficiently than competitors, like Costco or Walmart, tend to do well in downturns.

📊 Example: Amazon (AMZN) benefits from economies of scale and a logistics network that allows it to dominate e-commerce.

Brand Power – Companies with strong brand recognition tend to hold pricing power. (e.g., Apple, Coca-Cola)

• Network Effects – Businesses that get stronger as more people use them, such as Visa or Meta, tend to be resilient.
• Cost Leadership – Companies that can produce goods more efficiently than competitors, like Costco or Walmart, tend to do well in downturns.

📊 Example: Amazon (AMZN) benefits from economies of scale and a logistics network that allows it to dominate e-commerce.

3. Check Valuation: Is the Stock Undervalued?

A market pullback can make even the best stocks look attractive. Use valuation metrics to ensure you’re getting a bargain:

• Price-to-Earnings (P/E) Ratio – Compare to the stock’s historical average and industry peers.
• Price-to-Free-Cash-Flow (P/FCF) – A better indicator than P/E for capital-intensive businesses.
• Enterprise Value to EBITDA (EV/EBITDA) – Helps compare companies with different capital structures.

📊 Example: If a stock historically trades at a P/E ratio of 25 but is now at 15, it may be undervalued.

4. Focus on Recurring Revenue and Essential Products

During economic downturns, companies with recurring revenue streams and essential products tend to outperform. Look for:

• Subscription-based models (e.g., Adobe, Netflix, Salesforce, OpenAI, Anthropic, Google Gemini, Databricks)
• Consumer staples (e.g., Procter & Gamble, PepsiCo, Colgate-Palmolive)
• B2B software with high retention rates (e.g., Microsoft, ServiceNow, Amazon, Hubspot, Home Depot)

📊 Example: Adobe (ADBE) benefits from a strong subscription model, making revenue more predictable.

5. Look at Insider Buying and Stock Buybacks

One of the strongest signs of confidence is when company executives and board members buy their own stock or when companies repurchase shares.

• • Insider Buying – If insiders are purchasing shares, they likely believe the stock is undervalued.

<li”>Insider Selling — If insiders are selling shares in sufficient quantity, they may feel the short term to mid term outlook is negative.

• Buyback Programs – When companies use excess cash to buy back shares, it reduces the number of outstanding shares, increasing earnings per share (EPS).

 

📊 Example: Berkshire Hathaway regularly repurchases its own stock when Warren Buffett sees it as undervalued.

6. Consider the Industry and Economic Outlook

Some industries perform better than others during downturns. Defensive sectors like healthcare, utilities, and consumer staples tend to hold up, while tech and cyclicals may face more volatility.

• Defensive Plays – Johnson & Johnson, McDonald’s, Duke Energy
• Growth Stocks That Rebound – Amazon, Nvidia, Tesla (for long-term investors)

📊 Example: During the 2020 crash, healthcare stocks like Pfizer and Johnson & Johnson remained stable while tech stocks fell sharply.

7. Have a Long-Term Mindset

Many of the best investment opportunities arise during times of uncertainty. Investors who buy great companies during market dips and hold them for years often see strong returns.

Key takeaways:
✅ Prioritize financially strong companies with low debt and high cash flow.
✅ Look for businesses with durable competitive advantages.
✅ Focus on valuation—don’t overpay, even for great stocks.
✅ Favor companies with recurring revenue and essential products.
✅ Watch for insider buying and stock buybacks as confidence signals.

Buying equities on impulse is unwise.  It’s basically gambling with long odds. Hopefully this discussion gives you a start to wiser investing and developing a keen eye for the most investible stocks right now as the market heads into its bottoming.

Get up to date on the forecast for next week, stock market predictions, and how the Trump tariffs affect the stock market.

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