The HALO trade enters the earnings delivery phase, while capital-intensive assets retain structural support

Overview

This report uses the HALO (Heavy Assets, Low Obsolescence) framework to discuss the performance, valuation, earnings, and fund flows of capital-intensive stocks relative to capital-light stocks. The authors believe that higher real interest rates, geopolitical fragmentation, supply-chain restructuring, AI-driven capex expansion, and demand for energy security and strategic autonomy are shifting market leadership back toward companies with hard-to-replicate physical assets, networks, infrastructure, and engineering complexity.

Core views

The core view is that the first phase of valuation re-rating is largely complete, but the HALO trade is not over; subsequent returns will depend more heavily on earnings growth and companies' ability to deliver. EPS revisions and expected growth for capital-intensive stocks are improving, while the structural capex cycle continues to strengthen, particularly in data centers, semiconductors, utilities, and defence. In the short term, the trade may be affected by Momentum crowding and profit-taking; over the long term, Value, infrastructure, and physical-economy-related assets remain under-owned.

Analysis framework

The report cross-validates a macro strategy framework, basket relative performance, valuation comparisons, EPS revisions, a capex tracker, industry correlations, and fund-flow data. It primarily compares Capital Intensive (GSSTCAPI) with Capital Light (GSSTCAPL), while examining their relationships with Global Capex Beneficiaries (GSXGCAPX), the Momentum factor, and Value fund flows.

Methodology notes

• equity_strategyHALO

  Heavy Assets, Low Obsolescence

  Identifies stocks with heavy physical assets and low technological obsolescence risk that are better positioned during periods of high real interest rates, supply-chain restructuring, and rising capex.

• macro_cyclePost Modern Cycle

  capex boom and physical economy rotation

  Emphasizes the shift in investment from purely digital and capital-light models toward reindustrialization, infrastructure, energy security, defence, and capacity expansion in the real economy.

• relative_valueCapital Intensive vs Capital Light pair trade

  long GSSTCAPI vs short GSSTCAPL

  Measures the relative performance, valuation convergence, and changes in earnings drivers of the HALO theme by going long the capital-intensive basket and short the capital-light basket.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• GSSTCAPI

  The core long basket for the HALO theme, representing Capital Intensive stocks.

  Strengths

  Benefits from physical-asset scarcity, rising replacement costs, accelerating capex, improving earnings revisions, and pricing power arising from supply constraints.

  Weaknesses

  More cyclical and potentially affected by manufacturing, global trade, and short-term factor rotations.

  Comparison

  Relative to GSSTCAPL, its valuation discount has narrowed materially, but its EPS growth expectations and capex exposure are more favorable.

  Risks

  Its correlation with the Momentum factor has risen following the strong rally, creating potential for short-term pullbacks or profit-taking.

• GSSTCAPL

  The capital-light comparison basket in the HALO pair trade.

  Strengths

  ROE remains high, and some business models continue to demonstrate earnings resilience.

  Weaknesses

  Valuation is more dependent on distant cash flows and terminal value, while AI increases uncertainty about business-model disruption.

  Comparison

  Relative to GSSTCAPI, expected EPS growth is lower, and direct benefits from an upcycle in capex are weaker.

  Risks

  If investors continue to reduce their confidence in terminal value, valuation pressure may persist.

• GSXGCAPX

  The Global Capex Beneficiaries basket, used to measure beneficiaries of global capex.

  Strengths

  Directly linked to structural capex themes, covering AI investment, the energy transition, and reindustrialization.

  Weaknesses

  Affected by the capex cycle, financing costs, and project execution timelines.

  Comparison

  The report states that GSSTCAPI is among the parts of the European market with the strongest positive correlation with GSXGCAPX, while GSSTCAPL has a negative correlation.

  Risks

  If capex expectations are revised downward or structural demand is disproven, the related basket may come under pressure.

• Semiconductors and semiconductor equipment

  An important beneficiary of the structural capex cycle and the physical layer of technology.

  Strengths

  Driven by demand from AI, data centers, and hardware infrastructure, with supply expansion requiring long-cycle investment.

  Weaknesses

  The industry remains subject to cyclical and valuation volatility.

  Comparison

  Compared with pure software and services, semiconductor equipment has more direct exposure to physical infrastructure investment.

  Risks

  If AI capex slows, orders are revised downward, or capex concentration becomes excessive, earnings delivery may fall short of expectations.

• Infrastructure, Utilities and Defence

  Core thematic assets under the HALO framework.

  Strengths

  Own hard-to-replicate networks, pipelines, power grids, transportation assets, or specialized manufacturing capabilities, supported by energy security and geopolitical demand.

  Weaknesses

  May be affected by regulation, project approvals, fiscal cycles, and margin pressure.

  Comparison

  Relative to capital-light technology sectors, these assets offer greater defensiveness and pricing power in high-inflation and high-replacement-cost environments.

  Risks

  The defence sector has already experienced several years of strong performance, creating potential for short-term profit-taking.

Key data

• Year-to-date performance of the HALO pair tradeApproximately +20%Expressed as long Capital Intensive (GSSTCAPI) and short Capital Light (GSSTCAPL).
• Initial drawdown following the geopolitical shockApproximately -7%Absolute prices fell initially during the US-Iran war because of uncertainty and cyclical exposure, but subsequently rebounded rapidly.
• Relative position before and after the conflictCapital Intensive is currently approximately 2% above its pre-conflict levelThe report believes the geopolitical shock ultimately reinforced structural themes such as energy security and industrial sovereignty.
• Forward P/EGSSTCAPI approximately 14.5x; GSSTCAPL approximately 16xThe valuation gap has narrowed substantially, leaving less room for a purely valuation-driven re-rating than previously.
• Expected EPS growthGSSTCAPI approximately 15%; GSSTCAPL approximately 10%Earnings growth expectations are beginning to shift in favor of capital-intensive companies.
• 2026 capex growthApproximately 13%Above the historical median of approximately 2%, with expectations for 2027 also being revised upward.
• Structural capex concentrationData centers, semiconductors, utilities, and defence are expected to account for more than 40% of global capex in 2026This share is above approximately 25% in 2022, indicating that the capex upcycle is more structural than a temporary rebound.
• Rating distribution of the Capital Intensive basketApproximately half Buy-rated; approximately 10% Sell-ratedBuy-rated names are concentrated in infrastructure, basic materials, aerospace and defence, platforms, and the physical layer of technology.
• Fund flowsOver the past 12 months, Value funds saw approximately 3% of AuM in inflows, while Growth funds saw approximately 15% of AuM in outflowsDespite the rotation, cumulative flows into European Value relative to Growth remain approximately -30% of AuM, indicating persistent long-term under-allocation.

Impact & implications

The investment implication is that the primary driver of capital-intensive stocks is shifting from valuation recovery to earnings delivery, increasing the importance of stock selection. Beneficiary areas include infrastructure, utilities, energy, semiconductor equipment, data centers, power grids, aerospace and defence, and companies with scarce capacity or network assets. Capital-light companies have not lost all their value, but the impact of AI on terminal value, business-model sustainability, and the certainty of competitive advantages means they are no longer the uncontested winners they were in the previous cycle.

Risks

• Following the strong rally, HALO's correlation with the Momentum factor has risen to a high level, creating short-term risks from factor rotation and systemic position unwinds.
• The valuation gap has narrowed substantially, making future performance more dependent on earnings delivery; if companies fail to deliver the expected EPS growth, returns may come under pressure.
• Capex growth is concentrated in a small number of structural areas; if investment in AI, data centers, semiconductors, utilities, or defence slows, the theme's effectiveness will decline.
• Some beneficiary industries, such as commodities, remain highly volatile.
• Capital-intensive stocks are more cyclical and may be affected by manufacturing, global trade, interest rates, and geopolitical shocks.
• Capital-light companies still have high ROE; if concerns about AI's impact on terminal value ease, market style may shift back toward Growth or Capital Light.

What to watch

• Whether the EPS revision differential between GSSTCAPI and GSSTCAPL continues to widen.
• Whether capex growth for 2026 and 2027 remains subject to upward revisions, particularly in data centers, semiconductors, utilities, and defence.
• Whether HALO's correlation with the Momentum factor declines and whether a crowded-trade reversal occurs.
• Whether fund flows related to Value funds, Industrials, Infrastructure, and Commodities continue to improve.
• Whether performance differentials between Europe, Japan, and emerging markets and the US market persist.
• The earnings delivery of Buy-rated HALO names in infrastructure, basic materials, aerospace and defence, manufacturing platforms, and the physical layer of technology.