Morgan Stanley trader: "AI fear" may have peaked. If not, then buy HALO.

Morgan Stanley's trading division believes that the market panic over AI disrupting traditional industries may have peaked. For investors still worried about ongoing AI impact, physical assets with high barriers to entry and low risk of technological obsolescence (i.e., "HALO" trades) currently represent the best hedging strategy.

The latest catalyst for market sentiment came from a briefing by AI company Anthropic on their Enterprise Agents. Contrary to previous concerns that AI would completely replace existing software vendors, the event signaled a preference for "collaboration" rather than "replacement." This quick shift in expectations sparked a relief rally in software stocks that had previously been heavily shorted.

Before this turning point, fear of AI's disruptive power had significantly impacted the internal dynamics of the stock market. While the S&P 500 has been overall stable since the end of last October, extreme capital flows from hedge funds caused unprecedented internal divergence within the index, with capital rushing into AI beneficiary stocks and semiconductors, while software assets were indiscriminately sold off.

Although some initial buying has emerged in the software sector, Wall Street institutions point out that if "AI fear" has not been fully vanquished yet, the core logic of stock market pricing is undergoing a fundamental shift. Capital is accelerating away from the "scalable light asset narrative" toward "buildable, hard-to-replace physical capacity and networks."

Extreme Divergence and Rotation Beneath the Surface

Against a backdrop of marginally relaxed macro-financial conditions, the stock market appeared calm on the surface lately but underwent intense internal adjustments. Morgan Stanley trader Kunal Sodha notes that despite S&P 500 cash levels barely changing since late October, there has been significant internal correction within the stock market over the past four months, with divergence at an unprecedented degree.

Data reveals the extremity of this rotation. During this period, the return spread between growth stocks and value stocks (MSZZGRVL) saw a 24% drawdown, the Beta long-short portfolio (MSZZBETA) fell 21%, and the S&P 500 information technology and consumer discretionary sectors each dropped 11%. These adjustments, occurring absent any negative macro shocks, were entirely driven by the escalating "AI disruption panic," culminating in IBM's biggest single-day decline this century outside of the internet bubble burst.

However, large-cap indexes managed to stay range-bound because capital rapidly flowed into defensive and cyclical sectors. Industrials rose 13%, consumer staples 16%, materials 22%, and energy surged 25%. Looking at quarterly returns since 2021, the current gap in returns between the best and worst performing S&P 500 sectors is now at its third highest level since 2021.

Extreme Capital Flows and the Turning Point of "AI Fear"

Hedge fund flows further intensified the market's extreme positioning. According to Morgan Stanley's prime brokerage data, since the beginning of the year, hedge funds' net buying of semiconductors and full-stack AI assets (from power to AI beneficiary stocks) pushed these sector exposures to their highest level since 2020. On the flip side, Morgan Stanley's infrastructure software basket (MSXXINSW) has become the most heavily sold theme this year, with its positioning dropping to the 0th percentile since 2020.

However, these trades based on extreme positioning were reassessed after Anthropic's briefing. Goldman Sachs noted that the market sees Anthropic's approach as "collaborative" with current SaaS vendors rather than "replacement," sparking short covering in the software sector, and all constituents previously tagged "at AI risk" rebounded about 5%.

Deutsche Bank is even more optimistic. They believe that model providers are unlikely to replace existing software giants, but rather will position themselves as orchestration layers atop current systems. Since data and workflows reside within existing records systems (as Anthropic said, "Claude's usefulness depends on the data it connects to"), the accumulated knowledge and metadata of these existing systems are very difficult to replicate or replace.

Embracing HALO: Heavy Assets and Low Obsolescence as Safe Havens

For investors who think "AI fear" hasn't peaked yet, Morgan Stanley has a clear trading recommendation: buy the HALO theme. HALO stands for "Heavy Assets, Low Obsolescence," and this concept has now been widely adopted by Wall Street investment banks like Morgan Stanley, Goldman Sachs, and JP Morgan.

According to a previous article from WallstreetCN, a Goldman Sachs report on February 24 pointed out that, given higher real interest rates, geopolitical fragmentation, supply chain restructuring, and the AI capital expenditure wave, the market is going through a "scarcity repricing." Leadership in equities is returning to tangible productive assets. The market is rewarding capacity, networks, infrastructure, and engineering complexity, as these assets have extremely high replication costs and are difficult to obsolete through technology iteration.

The economic relevance of these assets can endure through technological cycles. Whether it's cross-national pipelines or national power grids, they cannot easily be replaced by code or digital innovation. Morgan Stanley's HALO basket (MSXXHALO) was built on this logic and covers seven structural pillars: Materials, Utilities, Railroads, Pipelines, Waste Management, Defense, and Signal Towers.

From both performance and valuation perspectives, this strategy is highly attractive. Over the past year, Morgan Stanley's HALO basket has risen 28%, while the "AI disruption-affected" stock basket has dropped 43% in the same period. In addition, this sector is not crowded, with net exposure at only the 53rd percentile since 2020. Morgan Stanley traders indicate that investors can currently position by buying 6-month, 110% call options on MSXXHALO, with an indicative cost of only 2.5%.

Risk Warning and DisclaimerThe market carries risks and investment requires caution. This article does not constitute personal investment advice and does not consider individual users' special investment goals, financial conditions, or needs. Users should assess whether any opinions, views, or conclusions in this article fit their specific circumstances. Any investment based on this article is at your own risk.