Breaking up with AI

After a torrid, years-long affair with AI stocks, investors are suddenly ghosting Big Tech and rebounding with… deodorant and cheeseburgers.

The market’s latest fling has been dubbed the “HALO” trade (heavy assets, low obsolescence). Traders are looking for shelter from industries getting smoked by mounting (and sometimes sketchy) evidence that AI is coming for them. So, they’re rushing to so-called “real” businesses like consumer staples, energy, or travel that they believe will survive either a technological armageddon, or the AI stock bubble bursting.

That’s led to a surge of interest in companies like McDonald’s, Budweiser, Walmart, and Costco over the past few days, while the software bloodbath is still ongoing next door.

The elusive “AI-proof” trade

In theory, their rationale makes sense: Even if we all become subjects of our robot overlords, we’ll still need paper towels and beer. But the HALO trade doesn’t exactly spell heaven for your portfolio.

The flip side is that a bunch of largely low-growth companies are now becoming overvalued due to a trend instead of their fundamentals. Case in point: Consumer staples are now trading at higher price-to-earnings ratios than the tech sector—a rare inversion that's coincided with a broader market downturn all three times it’s happened in the past seven years.

Reality check: A group of Morgan Stanley equity researchers argued in a note today that not only is the current AI-fear selloff overblown, but many of the stocks being “disrupted” by AI will actually benefit from the technology and are under-owned by investors. Companies viewed as most vulnerable to AI disruption make up just 13% of the S&P 500.

The team at Morgan Stanley argues that a stock-specific approach makes more sense than sector-wide judgements. They highlighted several companies it sees as positioned to benefit from the AI tailwind including software names like Microsoft, Salesforce, and ServiceNow, and banks like Citigroup. It also pointed to AI-adopter “underperformers” that could have huge upside potential, such as Accenture and Amazon.

More importantly, picking winners and losers is just plain difficult, given nobody knows how the dust will settle: “Stepping back, at the heart of the AI disruption debate is a technology that is improving at a non-linear rate, which presents challenges to assessing impacts given the dramatic ‘duration mismatch’ between the rate of AI capability growth and the long duration implied in most equity valuations,” wrote Stephen Byrd, global head of thematic and sustainability research at Morgan Stanley.

Even the HALO trade can’t protect investors from the force of gravity.—LB