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In this issue:
- Global Equity Market Performance
- Background
- The Staples Slump
- The Software Slump
- February So Far
- Wrapping Up
Global Equity Market Performance
The S&P/TSX 60’s eight month winning streak came to an end in January. It was having a decent start to the year until the last day of the month when it fell 2.9% and closed down 0.7%. MSCI Emerging Markets was the leader, up 7.2%. MSCI EAFE gained 4.1% and the S&P 500 eked out a 0.5% return.
As of this writing—the second week of February—our systems are indicating positive momentum in all four equity markets although there are some signs of caution in certain sectors.
If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here.
Last month we highlighted some historical similarities in technological developments and their market impact in the past and now. This month we will look at how AI is affecting different sectors of the market in some surprising ways.
Background
ChatGPT was released to the public in November 2022. In February 2023, we wrote about the immediate effect on the stock prices of two of the largest tech companies in the world, Microsoft (MSFT) and Alphabet (GOOG).
Alphabet had been working for years on large language models—what everyone now calls AI. They had a presentation on February 6, 2023, where they explained their progress and plans. Mister Market was unimpressed. The next day MSFT had their own presentation. They had invested $10 billion in OpenAI, the owner of ChatGPT, valuing it at $30 billion. Over the next week GOOG fell 12% erasing 100s of billions of dollars of market capitalization while MSFT rallied 4%.
The next big mover was Nvidia (NVDA). It became the most valuable company in the world driven by demand for their graphics processing units that are highly suited for AI workloads. It has significantly outperformed MSFT and GOOG.
That was then. Let’s look at what is happening now.
The Staples Slump
The hopes and dreams of AI have, until recently, lifted many boats in the tech world. Last year the two best-performing sectors in the S&P 500 were Technology and Communications.
Side note: sector definitions can be confusing. It makes sense that two of the biggest tech companies—NVDA and Apple (AAPL)—are the largest weights in the Technology sector. What may surprise some is the top two in Communications are Meta Platforms (META, formerly Facebook), and GOOG.
The worst-performing sector was Consumer Staples—by a lot.
The two largest components of the Consumer Staples sector are Walmart (WMT) and Costco (COST). Who needs food and clothing when you can own processors, phones, search and social.
So far this year, it seems food and clothing are back in style.
In January Staples were one of the top performers along with Energy and Materials. Technology and Communications are two of the worst.
Let’s look a little closer into the tech sector.
The Software Slump
As mentioned, the sector definitions can be a bit counterintuitive. The third largest component of the Technology sector is MSFT which is all about software. It’s right in the name. NVDA is strictly hardware. AAPL is hardware, software and other things.
There is another more specific index, the S&P North American Expanded Technology Software Index, ETF symbol IGV. It’s two largest holdings are MSFT and Palantir (PLTR) which is also in the Technology sector.
They have both had a difficult January while COST and WMT did well. When you look at the broad Staples index versus the narrower Software index, the story is similar.
Last month Staples outperformed Software by 22%.
The irony is, one of the biggest early market sentiment beneficiaries of the AI boom was MSFT—it was down 11% in January.
In markets, every trend needs to have a narrative once it is established. Notice that very few were talking about how the adaption of AI technology into supply chain and inventory management (and other aspects of its high-volume business) could benefit a company like COST, when the stock was down.
MSFT was considered a first mover in search over GOOG in 2023 when they invested in OpenAI. Now the story is: AI will ruin their business.
Is this simply mean-reversion or are the most recent pundits correct? Maybe it’s a bit of both. Maybe it will flip again and no one will want to own food and clothing in a few months. Stay tuned.
Now for more recent news.
February So Far
This trend continues so far this month. As of February 13, Staples are up 7.1% and Software is down 8.3%.
On February 2, SpaceX announced the acquisition of xAI. According to Ark Invest, an innovation investment firm: The strategic objective appears to be vertical integration across launch, compute, and AI: SpaceX as the launch provider via fully reusable Starship, deploying orbital data centers for xAI… this represents the ultimate technology-convergence story across reusable rockets, distributed energy, robotics, and artificial intelligence.
Data centers in space combined with rockets and AI. Skynet in the Terminator series of films might ring a bell. Let’s hope Musk has seen the movies.
In a market we have written about before, private credit, two worlds converged (collided?). Blue Owl Capital (OWL) fell 36% in 2025 and is down another 8.7% so far this year, driven by concerns that some of its loans to software companies may default and by rising investor redemptions. OWL is one of the largest private credit companies in the U.S.
In more mundane news, the Bank of Canada is on hold due to their perception that: the outlook is vulnerable to unpredictable US trade policies and geopolitical risks. Isn’t that always the case?
Wrapping Up
Markets are in the business of confusing the players. In our October letter we highlighted the surprising outperformance of the S&P/TSX 60 in 2025 relative to the tech-heavy S&P 500. The two sectors that drove that result were miners and banks.
The AI narrative has shifted. Three years ago MSFT was the winner. Now AI might be a threat to its business.
Last year, software and tech stocks were unstoppable. Now consumer staples—food, clothing, everyday essentials—have become the outperformers leaving tech in the dust.
WMT and COST are perceived as benefitting from using AI to sharpen supply chains, optimize inventory, and enhance member experience, turning what might have been seen as a problem into an advantage.
Rotations happen. It’s impossible to predict the next big thing.
We follow a simple approach—measure momentum with our systems, manage risk, and stay diversified in broad index ETFs. That way, our chances of capturing the next new thing are improved.
Canada currently stands 11th in the medal count at the Milano Cortina Olympic Winter Games. Let’s hope that trend reverses.
Enjoy the games.
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