A notable move of capital out of technology stocks and into other areas of the market has captured attention this month, with both cyclical sectors and defensive names drawing fresh inflows. While rotation into cyclicals can be read as a sign of optimism about growth and stronger manufacturing data, Citi strategist Dirk Willer highlighted that the parallel demand for defensive stocks is an uncommon pattern and often signals that investors are seeking protection rather than taking on more risk.
Consumer staples in particular have outperformed the S&P 500 by about 10% over a one-month span, a gap that Citi characterized as unusual outside of pronounced market downturns. The bank’s historical review back to 1998 identified only five prior episodes when staples beat the broader index by at least 7% while the S&P 500 remained above its short-term trend. Those instances occurred in April 2000, July 2000, January 2022, April 2022, and February 2025. In each of those cases, the periods that followed produced softer equity market conditions.
Citi’s tactical indicators already point toward a period of volatility for equities. After previously signaling pullbacks, the bank’s indicators now imply choppier trading into late January. According to the historical patterns tied to this signal, the expected outcome would be modest declines or sideways movement rather than a sharp drop, and not a clear resumption of a strong upward trend.
Willer framed the rotation into defensive sectors as a potential early warning that market participants are growing more concerned about downside risks. He noted that while diversification into defensives may prove helpful later if the technology-driven rally loses steam - particularly in the event the AI investment cycle cools - Citi’s longer-term indicators have not triggered a broader structural alarm. In other words, the bank does not see an overarching, long-term market warning from its longer-term measures, but it views the move into staples as a signal worth monitoring because it has tended to appear when equity momentum fades.
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Investor behavior that simultaneously favors cyclicals and defensives is notable for its mixed signals: it can reflect hopes for growth while also showing a desire for protection. Citi’s findings and tactical signals imply investors should be prepared for a period of choppy trading and should monitor staples’ relative strength as a potential early indicator that equity market momentum is waning.