By Paul R. La Monica
Artificial intelligence is upending the stock market, and seemingly old-fashioned consumer stocks are getting a boost as investors play defense.
That rush for safety, ironically, is making consumer stocks a little riskier than normal.
The State Street Consumer Staples Select Sector SPDR exchange-traded fund has surged 12% so far this year, while the S&P 500 has gained less than 1%. Investors likely are attracted to the juicy dividends offered by staples stocks too.
Only energy and materials stocks have done better. The technology, financials, and communication services sectors, meanwhile, are the biggest laggards. Those three sectors are now all in red for the year.
Investors may be betting that staples companies -- such as giant retailers Walmart and Costco Wholesale (which are big players in the grocery business) and consumer products firms like Coca-Cola and Procter & Gamble -- might not suffer as much from AI disruption compared with many software and services companies and financial firms.
ChatGPT is great for many things. But if you're craving a soda, have to shave, or want to wash your clothes, AI can't really help you there. You still might need to go to your local big box store (or order online) to get your favorite beverage, razor, or detergent.
But while AI might not upend the business models of consumer staples companies, the problem is some investors already realize this. The sector's perceived safety could be priced into many of the group's leading stocks. Valuations are frothy.
Walmart and Costco both trade for more than 40 times earnings estimates for this year, a giant premium to the S&P 500's price-to-earnings ratio of 22. To further put that in perspective, the Roundhill Magnificent Seven ETF trades at a multiple just north of 30.
Other consumer staples stocks look rich as well. P&G trades at 21 times earnings estimates for 2026 ,while Coke's forward earnings multiple is 24.
It appears that both retail and institutional investors are piling into staples stocks as a haven trade. According to data from Jill Carey Hall, equity and quant strategist with Bank of America Securities, inflows into staples stocks over the past four weeks have been the highest since the firm started tracking such data in 2008.
"Hedge fund, institutional and retail clients were all buyers, with inflows driven by large cap [stocks]," Hall noted. But she added that staples could have a little more room to run since many actively managed funds still own less of the sector compared with their benchmarks.
That may be true, but others urge caution, given the sector's dramatic run-up. UBS analyst Peter Grom noted in a report Tuesday that Pepsi, Keurig Dr Pepper, Newell Brands, and P&G look like they might be overbought, or so-called "crowded longs." The same goes for Coca-Cola, Monster Beverage, PowerBar maker BellRing Brands, and private label brand company TreeHouse Foods.
It is undeniably a good sign to see staples stocks, as well as other sectors like energy, materials, and industrials start to post bigger gains after more than three years of tech giants driving the bulk of stock market returns. This broadening out trade can help those who may have gotten overexposed to software, semiconductors, and other tech subsectors that are now taking a hit.
But investors have to pay attention to valuations and growth prospects as well. Nvidia is now trading at a P/E ratio of 22.5, about in line with the broader market's multiple. What's more, the chip giant has a price-to-earnings growth $(PEG)$ ratio below 1, meaning that is trading at a multiple lower than its expected long-term earnings growth rate. In other words, investors might get more bang for their buck with the AI chip maker's expected earnings growth.
In comparison, the consumer staples ETF is trading at a PEG ratio of 3.5 while Costco and Walmart have PEGs of 5.5 and 7 respectively. Sure, they may deserve some premium because they are safer, big dividend-paying companies with lower AI disruption risk. The sector is also still playing catch-up to the broader market; the staples ETF is up just 11% over the past 12 months compared to the S&P 500's 14% gain.
But this looks like a classic case of a move that's gone too far and too fast.
Write to Paul R. La Monica at paul.lamonica@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.
(END) Dow Jones Newswires
February 04, 2026 16:07 ET (21:07 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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