2/24 Market Pulse: Peak Fear? & The Real AI-Winner Trade.
From the TightSpreads Substack.
Has AI Disruption Fear Hit a Local Peak? The Under-Owned HALO Trade Offers Compelling Asymmetry in a Record Rotation
When Fed board members publicly comment on a viral Substack post about AI disruption, it’s worth pausing. Are we nearing a local peak in this fear trade within equities?
Since the end of October 2025, the SPX cash index is essentially unchanged. Yet beneath the surface, we have experienced one of the most violent rotations and drawdowns of the cycle — without any negative macro shock and while financial conditions have actually eased (10y yields -16bps, 2y yields lower, dollar weaker).
The rotation in numbers (as of Feb 24 close):
Growth vs Value (MSZZGRVL): -23.97% max drawdown since Oct 30, total return -22.21%
Beta L/S pair (MSZZBETA): -20.89% drawdown
S&P Info Tech & Consumer Discretionary: both ~11% drawdowns
Winners on the flip side: Cyclicals vs Defensives +10.37%, Industrials +13.23%, Consumer Staples +16.17%, Materials +22.17%, Energy +25.72%
This is pure positioning and narrative-driven pain. The broad market index has masked an extraordinary bifurcation because the losers (high-beta growth/tech) are heavily weighted, while the winners (cyclicals, defensives, hard assets) have quietly outperformed.
This is the 3rd-largest quarterly sector return spread in the S&P 500 since Q1 2021 — behind only Q2 2025 and Q1 2022.
Factor volatility context
10-day realized volatility across key factors (Momentum, Beta, Growth vs Value, Cyclicals vs Defensives) spiked in early February to the highest level since the April 2025 tariff sell-off, and prior to that November 2022. It has since moderated to ~22.3, but the episode reminds us that elevated gross leverage + factor crowding can create disorderly price action even when the index appears calm.
Historical perspective makes this move unusual
Since 2021, every time the Beta pair has fallen 20%+ in a rolling four-month window, the SPX has averaged -11.2% and NDX -15.96%. The key difference this time: financial conditions have eased, not tightened. Lower yields and a weaker dollar normally support growth stocks — yet they have still sold off hard. This tells us the driver is not macro deterioration but narrative and positioning.
Flows have reached textbook extremes (MS Prime Brokerage data as of Feb 23 close)
Most Net Bought YTD North America Themes (all at or near 100th %-tile exposure):
Semiconductors
AI Semis
AI Tech Beneficiaries
Electrification
AI Power
Late Cycle Cyclicals
Most Net Sold YTD (many at 0th %-tile):
Unprofitable Tech
Domestic Industrials
AI Disrupted (MSXXAIDT)
Life Insurance
Software M&A
Broad Software
Infrastructure Software (now the single most-sold thematic YTD — even the “picks and shovels” layer has seen indiscriminate selling)
Hedge funds have piled into the “AI winners” stack while aggressively selling anything perceived as disrupted or lower-quality. This is now a classic crowded-trade fragility and high potential for mean-reversion when the narrative shifts even modestly. Check my last software note to find which of the most shorted stocks have the potential to unwind and squeeze to the upside.
The Anthropic Enterprise Agents livestream (Feb 24) was less bad than feared
The tone was overwhelmingly about enterprise adoption and productivity gains rather than pure job replacement. Salesforce (CRM) used the event to reposition itself from “disrupted” to “adopter,” highlighting Claude models in Slack reclaiming 97 minutes per week for users. A tentative bid in previously beaten software names emerged intraday.
The HALO trade remains strikingly under-owned
If you believe AI disruption risk still has further to run — or even if you simply want exposure to real assets in a high nominal growth world — the Hard Asset Limited Obsolescence basket trade is becoming a popular defensive trade for hard-to-distrupt segments within the AI theme.
It comprises seven structural pillars: materials, utilities, railroads, pipelines, waste operators, defense, and towers — scarce, tangible infrastructure that is extremely difficult for AI to obsolete.
Performance edge:
Last 12 months: MSXXHALO +28% vs AI Disrupted basket -43%
Normalized chart (as of Feb 24): HALO at 128.8 while AI Disrupted sits at 57.6 — the widest spread since early 2025.
Positioning is far from stretched:
HF net exposure as % of total North America net exposure: 53rd percentile since 2020, 30th percentile last 12 months (see red circle on chart — still near multi-year lows relative to history)
The rest of the article will provide the stocks in the new product baskets (a basket is a group of stocks, long or short, that are weighted out to express a theme or idea) MS has made for institutions to buy as aligned with this article. It explains how the stocks were picked and why these names specifically.
It includes:
The MS HALO basket (MSXXHALO) is diversified across seven structural pillars – metals + materials, utilities, railroads, pipelines, waste operators, aerospace / defense, and towers. ‘HALO’ (Heavy Asset, Limited Obsolescence) is the new acronym to describe the recent rotational preference amid AI disruption concerns -- essentially a move toward asset-heavy businesses that are viewed as less disrupted, rather than asset-light / high-margin businesses that have dominated for decades.
The Broad AI Disruption Risk basket (MSXXDIST) focuses on industries that monetize human cognitive labor, workflow friction, and administrative work – the basket spans IT services, staffing / recruiting, insurance brokerage, credit / risk analytics, real estate advisory, advertising agencies, healthcare administrative services, legal and compliance information platforms, engineering consulting, retail brokerage, education providers, and selected creative content platforms. Software is ~10% of the basket.
The rest of this article is available to Premium Subscribers of the TightSpreads Substack.