Investors' search for safety has made toothpaste stocks more expensive than tech

By Isabel Wang

The rush to hide from technology stocks has made even the market's usually staid defensive sector look expensive

One of the safest trades on Wall Street is getting expensive

Investors fleeing technology stocks in October have found a safer place to hide: consumer stocks of toothpaste and laundry-detergent makers and sellers. Yet those "safe havens" are getting more expensive than high-growth AI names they decided to leave behind.

The S&P 500's consumer-staples sector XX:SP500.30 has been a surprise winner within the large-cap benchmark index so far in October, as a sharp selloff in technology names dragged down growth-related sectors and gave some traditionally defensive names room to shine.

As a result, consumer-staples stocks - companies that sell food and essential household products that people always need regardless of economic conditions - already have popped nearly 9% this month, according to FactSet data. That compares with the S&P 500's SPX less than 1% gain and the information-technology sector's XX:SP500.45 3.8% drop during the same period.

The rally in consumer staples also upended a longstanding market dynamic. Tech no longer ranks as the S&P 500's most expensive sector, something it has long commanded on expectations of faster earnings growth and high margin potential. Staple names, which include Costco Wholesale (COST), Walmart Inc. (WMT) and Colgate-Palmolive (CL), have taken that crown.

Consumer-staples stocks normally trade at lower, more defensive multiples because of steady growth and reliable dividends. But that doesn't seem to be the case any longer. The S&P 500's consumer-staples sector traded at a forward price-to-earnings ratio (P/E) of 23.8 as of Tuesday morning, compared with 19.8 of the information-technology sector, according to FactSet data.

"Staples have become relatively more attractive as a hedge against tech concentration and AI uncertainty, but the rally has made select leaders and arguably the sector in aggregate, less cheap, not universally overvalued," said Mark Hackett, chief market strategist at Nationwide's Investment Management Group. When a stock or sector is "overvalued" it can mean it's expensive based on earnings projections.

Parts of the staples group do look expensive. Walmart and Costco are trading at roughly 42 and 48 times forward earnings, respectively, despite projected earnings growth that's well below that of the tech sector.

But when investors get nervous about the outlook of the artificial-intelligence trade or the health of the economy, they often rotate into defensive sectors, such as consumer staples. If that trade also becomes crowded, that leaves fewer places for investors to hide.

The recent sharp bond-market selloff suggests the appeal of owning Treasurys BX:TMUBMUSD30Y BX:TMUBMUSD10Y has been crowded out by the deluge of corporate borrowing for the AI buildout and global government-debt issuance to fund national deficits. There's also the roughly 50% plunge in silver prices (SI00) from its record high, which points to mounting concerns about an economic slowdown.

It makes sense for investors to pay a premium for "dependable earnings" of consumer-staples stocks, but some of the best-performing names may already be pricing in an unusually rosy outlook for the sector, Hackett told MarketWatch on Tuesday. "If inflation pressures margins, consumers trade down or earnings disappoint, those high-multiple names could be vulnerable," he said.

The consumer-staples sector has often outperformed the broader stock market during economic downturns. Over the past four recessions, defined as two consecutive quarters of declines in real gross domestic product, the sector gained an average 2.2% in the first six months after a recession began and nearly 6% after one year, according to Dow Jones Market Data (see table below).

The U.S. economy is not currently in a recession, yet labor market and consumer spending are showing distinct signs of cooling due to sticky inflation and elevated borrowing costs, which makes major household purchases like homes and cars significantly more expensive for American consumers.

But in the view of Hackett, the recent leadership of staples looks more like a defensive rotation than a sudden improvement in consumer demand. "Investors have been taking risk down amid concerns about AI-related capital spending, financing costs, valuation and the sustainability of tech earnings expectations. That has favored companies with recurring demand, pricing power and relatively stable cash flow," he said.

But a technical analysis shows that an extreme shift in market sentiment toward staples points to a bullish case for consumer stocks over the next few months, even though they could pull back in the very near term, according to analysts at SentimenTrader.

At the beginning of the month, fewer than 10% of consumer-staples stocks were trading above their 50-day moving averages, but that jumped to more than two-thirds within just over two weeks. When an asset trades above its 50-day MA, its medium-term trend is generally considered bullish.

In other words, that means the rally suddenly broadened to most of the sector from only a handful of consumer stocks, said analysts at SentimenTrader. "We've seen that quick shifts suggest a reliable change in sentiment in prior years. That has been the case for staples as well. Across 10 similar signals, instances of negative returns five months out and beyond were extremely rare," they wrote in a Monday client note.

"While aggressive traders should be mindful of a potential short-term pullback over the next week, strategic investors can view any near-term weakness as a prime opportunity to build positions ahead of a highly probable broader recovery," the analysts said.

Mike DeStefano contributed

-Isabel Wang

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10-20-26 1338ET