By Paul R. La Monica

The great rotation out of software stocks and into safer areas such as consumer staples is well under way. Investors clearly believe the rise of ChatGPT and other AI large language models will hurt services-oriented businesses while the makers of household products will emerge relatively unscathed.

That may be true. The problem is that valuations for many leading stocks in the consumer staples sector -- which includes Walmart, Costco, and supermarket chain Kroger -- now look stretched.

The State Street Consumer Staples Select Sector SPDR ETF, up 12% already in 2026, is trading at more than 20 times earnings estimates for the next 12 months. Walmart and Costco are even more expensive, with forward price-to-earnings ratios around 45. Coca-Cola, Monster Beverage, and Colgate-Palmolive also trade at P/Es that are higher than other consumer staples peers.

Chris Senyek, chief investment strategist for Wolfe Research, said in a report Monday the staples sector is as overbought as it has been since 2017 and noted valuations are even starting to approach levels from the late 1990s.

Although the stocks are no longer cheap, others argue the rally for the staples sector makes sense. UBS analyst Peter Grom said in a report last week that while "much of the move is being driven by the broader market rotation, it is also coming at a time when the fundamentals, at least for now, seem to be stabilizing/showing some signs of improvement."

Grom has Buy ratings on Coke, despite its premium valuation, as well as rival Pepsi, which trades at 18 times earnings forecasts, a discount to Coke as well as the rest of the staples sector.

In addition to Pepsi, there are pockets of value in the staples sector. Tobacco company Philip Morris is trading around 21.5 times earnings estimates. While that isn't necessarily cheap, it is a lower multiple than many other staples stocks.

The company also pays a dividend that yields more than 3%. That may not sound all that juicy -- fellow tobacco company Altria pays a yield that exceeds 6% -- but Philip Morris is making a big bet on smoke-free products such as iQOS and Zyn.

It also is expected to post earnings growth of about 11% to 13% this year, which is well above staples peers, said Goldman Sachs analyst Bonnie Herzog. That is a key reason why she has a Buy rating on the stock, arguing it is one of the best growth stories in the sector.

Stifel analyst Matthew Smith agrees, pointing out in a recent report that Philip Morris has growth pillars that should sustain momentum for years to come. Smith also has a Buy on the stock.

But many investors who are flocking to staples stocks are likely doing so because they want the safety of those big dividend yields.

Along those lines, stalwarts such as Conagra, General Mills, Kimberly-Clark, Hormel Foods, Clorox, and JM Smucker all pay dividends yielding in excess of 4% and are trading at P/E ratios below the average for the rest of the staples sector, according to data from FactSet. So is Altria.

These stocks might help investors sleep better at night now that the staples sector is suddenly becoming a market darling. But the challenge will be to find the companies that pay healthy dividends but aren't trading at premiums to the rest of the sector and the broader market.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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February 09, 2026 14:10 ET (19:10 GMT)

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