US markets bled in October as the S&P 500 Index fell 1.9% and the Nasdaq 100 fell 7.9% after artificial intelligence (AI) enthusiasm got a reality check. The dip continued as Democrats won the US mid-term elections, reversing AI investment enthusiasm. Meanwhile, the finance- and energy-heavy TSX 60 Index gained 1.7% in October, creating a good environment to buy and hold Canadian stocks that can hedge against an AI dip.
According to Goldman Sachs Research, AI investments accounted for almost half of the S&P 500’s earnings per share (EPS) growth in 2026. These earnings are expected to slow as hyperscalers struggle to raise more capital expenditure. Meta’s desperation to issue more equity shares to raise capital, and Google’s recent earnings showing its “AI overview” eating into traditional ad revenue, show that AI is disrupting the traditional model.
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Will the AI correction continue in November?
The $800 billion AI capital expenditures (capex) in 2026 translated into EPS growth for semiconductors, hardware, utilities, and industrial firms, as per Ben Snider, chief US equity strategist at Goldman Sachs Research. However, this growth is likely to fade in the coming quarters as capex growth slows. As a result, chipmakers like Intel, Qualcomm, SanDisk, and Advanced Micro Devices were among October’s biggest losers.
Multiple reasons are driving this correction. Firstly, the US Fed hiked interest rates in September, which made AI debt worrisome. Secondly, rising energy prices kept inflation high. This has started to test investors’ patience on AI returns. Accelerated depreciation of AI capex and slower adoption of AI is like a ticking time bomb that makes short-term returns highly volatile.
Anthropic’s IPO prospectus is circulating in media circles, highlighting risks ranging from security incidents to climate change, rogue agents to an existential crisis for humanity. The company’s S-1 filing states, “In addition, with the scale of harm that could result from a catastrophic AI-related incident, no single insurer, and potentially the insurance industry in the aggregate, may have sufficient capacity or expertise to underwrite insurance commensurate with such exposure.”
Any AI incident can affect insurance stocks. These are worst-case scenarios that haven’t been realized so far. But they exist and could create a global crisis bigger than the Global Financial Crisis, climate change, and cybersecurity. With great risk comes exponential growth potential, but that potential will take time to materialize. Anthropic’s IPO will determine how the market responds to AI opportunities and threats.
TSX stocks to hedge your TFSA portfolio against the AI correction
Canadian investors should prepare their Tax-Free Savings Account (TFSA) portfolio for both AI’s growth opportunities as well as risks. If you have been investing in AI chip stocks and have seen sizeable growth, it is time to rebalance by shifting some of that profit into contrarian stocks.
Loblaw stock
When uncertainty hits, investors move to traditional businesses where there is certainty. Loblaw’s (TSX: L) food, pharmacy, and healthcare retailing make it a go-to stock as rising interest rates and the Democrats’ win in the US mid-term election point towards a slowdown in AI spending. The defensive nature of the grocery business and low volatility of Loblaw stock make it a buy-and-hold for the long term.
Constellation Software stock
Constellation Software (TSX: CSU) can also benefit from an AI correction given its portfolio of traditional software companies that cater to mission-critical applications. The stock has jumped 18% since October 9, when the AI stock correction began. Since July 2025, Constellation stock has been struggling to overcome the downtrend triggered by the founder’s exit and the risk of AI disrupting traditional software. The new management tweaked the acquisitions strategy toward larger software companies, which have been trading at distressed valuations amidst the AI wave.
Constellation is not immune to AI. It is also experimenting with AI, but the management is not losing sleep over it. The core business of acquiring mission-critical software companies remains at the heart. It is a stock to buy and hold for the long term, as AI and mission-critical software find a balance.
CT REIT is a good TFSA stock for its dividends from Canadian Tire. It is unaffected by the AI rally and has mitigated risk from interest rate hikes.
