AI jitters are turning discount chains and shampoo makers into the stock market's hottest trade - and that's risky

By Isabel Wang

Consumer staples, long seen as a safety play when tech stocks sell off, are now among the riskier bets on Wall Street

The bubble may have shifted from artificial intelligence to soap.

Not long ago, megacap tech was Wall Street's poster child for frothy valuation. But among the market's priciest names today are not just artificial-intelligence darlings but also discount retailers and shampoo makers - a sign that even defensive trades may be now getting expensive.

In early 2026, investors have flocked to consumer staples stocks - a traditionally defensive sector of the S&P 500 made up of companies that sell essential products like food, beverages and household goods that remain in demand regardless of economic conditions.

The State Street Consumer Staples Select Sector SPDR exchange-traded fund XLP has surged over 15% so far this year, while the benchmark S&P 500 SPX has risen just 0.7% during the same period. The rally has also made the S&P 500's consumer staples sector XX:SP500.30 one of the best performers among the large-cap index's 11 sectors in the year to date, according to FactSet data.

But just as AI hype has sent technology stocks to frothy highs, investors are pouring into consumer staples with the same enthusiasm, pushing some retailers toward valuations that feel equally inflated.

Walmart (WMT) and Costco (COST) shares were trading at 43.01 and 46.72 times their forward 12-month earnings estimates, respectively, as of Tuesday. By comparison, the S&P 500's forward price-to-earnings ratio stood at 23.3, while the tech-heavy Roundhill Magnificent Seven ETF MAGS was at 29.14 times forward earnings estimates, according to FactSet data.

Earlier this month, XLP's expected earnings multiple had climbed to 21.04, its highest since September 2024, according to FactSet data.

"The 'safety trade' has worked so far," said Jim Thorne, chief market strategist at Wellington-Altus Private Wealth. "But staples have, themselves, become a crowded, valuation-rich risk if recession fails to appear and growth proves more durable than feared."

Investors in 2026 have bet that consumer staples companies might not be hit as hard by AI disruption as software names and other tech firms that are seen as facing displacement risks from AI. But the very rush into consumer staples meant to reduce risk is pushing those traditionally defensive stocks into frothy territory.

See: The S&P 500 is undergoing a historic shift that could reshape the stock market

Hardika Singh, economic strategist for market intelligence at Fundstrat Research, said that stock sectors like staples "being so hot is becoming concerning." Over the past seven years, she said, there have only been three other periods when staples were trading at higher multiples than the technology sector XX:SP500.45: the COVID-19 market crash, the 2022 bear market and the stock selloff that followed President Donald Trump's "liberation day" tariff announcement last year.

"None of those were really good times for stocks," she told MarketWatch in a phone interview on Tuesday.

See: Did a blog post just cause software stocks to lose more than $200 billion in market cap?

Are consumer staples really a good AI-resistant play?

Consumer staples do seem like a good bet in terms of AI-resistant plays, Singh said, adding that the sector's dividend yield of about 2.08% surpassed the 1.09% yield of the broader S&P 500 index.

See: Is Walmart now a tech company? Stock surges after AI moves, Nasdaq-100 inclusion.

Still, being AI-resistant doesn't mean consumer staples companies have nothing to do with the technology. A handful of companies such as Walmart and PepsiCo (PEP) are capitalizing on the AI boom by deploying AI-powered tools to streamline tasks and improve customer service.

However, those companies are unlikely to benefit from AI on a mass scale, according to Singh. "AI is still helping them grow, but it won't come close to the amount of growth that a tech company can post this year," she said.

"How is a company selling shampoo going to benefit from AI to that extent? And the bigger question is, will AI ever be able to be used on a mass scale for companies that have these physical industries?" she added.

Also read: Financial stocks are off to their worst yearly start in a decade. How to spot value.

U.S. stocks finished higher on Tuesday afternoon, with all three major indexes recovering some of their losses in the previous session. The S&P 500 rose 0.8%, while the Dow Jones Industrial Average DJIA was also up 0.8% and the Nasdaq composite COMP surge over 1%, according to FactSet data.

-Isabel Wang

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02-24-26 1621ET