Goldman's HALO Thesis: A Portfolio Re-Weighting for the AI Capital Cycle

The market is undergoing a fundamental re-rating, one that values tangible assets over digital ones. This is not a fleeting trade but a structural shift driven by artificial intelligence's dual economic shocks. The new leadership paradigm is what Goldman Sachs calls HALO: Heavy Assets, Low Obsolescence. The thesis is clear: in an era of rapid technological change, investors are paying up for capacity, infrastructure, and engineering complexity because these are costly to replicate and less exposed to disruption.

The performance data underscores this rotation. Since the start of 2025, capital-intensive stocks have outperformed their capital-light peers by about 35%. This isn't a bet on a slowing economy; it's a search for lower fragility. The rotation reflects a flight to shelter from AI's disruptive potential, not a recession forecast.

That shelter is being sought for two distinct reasons. First, AI is directly challenging the dominant SaaS business model, repricing the terminal value and long-term margin durability of software and IT services. Second, and more profoundly, the pursuit of AI leadership is transforming the very nature of market leadership. The five major U.S. hyperscalers-Amazon, Microsoft, Alphabet, Meta, and Oracle-are on track to spend $1.5 trillion on AI infrastructure between 2023 and 2026. That dwarfs their entire historical investment of roughly $600 billion prior to 2022. In essence, the champions of the capital-light era are becoming capital-intensive giants almost overnight.

The result is a market that now rewards businesses with tangible productive assets. Sectors like utilities, basic resources, and energy are seeing their economic value recognized. Companies like ASML, LVMH, and Airbus are selected for their HALO baskets because they possess assets that are difficult to replicate. The bottom line for portfolio construction is a permanent recalibration of risk and return, where asset hardness provides a structural tailwind against the volatility of technological obsolescence.

Capital Allocation & Sector Rotation: Where to Deploy

The HALO thesis compels a decisive re-weighting of institutional portfolios. The strategic underweight is clear: pure-play software and other capital-light sectors face a structural repricing of terminal value. The thesis calls for an overweight in utilities, energy, and industrials with tangible, hard-to-replicate assets. This isn't a tactical trade but a reallocation toward the new quality factor-asset hardness provides a durable risk premium in an era of AI-driven obsolescence.

Institutional flows are already signaling this rotation. Long-only European funds were reducing positions in stocks at risk of AI disruption by late 2025, a pattern that aligns with the broader market's flight to shelter. This represents a tangible shift in capital allocation, moving away from the intangible assets that powered the last bull market and toward the physical infrastructure that now commands a premium.

The earnings momentum is now turning in favor of the capital-intensive thesis. Consensus estimates for earnings-per-share growth and return on equity are higher for these companies than for their capital-light peers. This shift is critical; it suggests the market's re-rating is being validated by fundamental performance, not just sentiment. The setup is for a sustained period where capital allocation favors businesses with high barriers to entry, whether through regulation, engineering complexity, or sheer scale of required investment.

For portfolio construction, the implication is a permanent recalibration. The era of persistent valuation premiums for scalable, low-capital businesses is yielding to one where liquidity and credit quality are anchored by tangible productive capacity. The bottom line is a conviction buy in sectors built on heavy assets and low obsolescence, as the market's search for shelter from AI's dual shocks finds its most durable answer in the physical world.

Risk-Adjusted Returns & The Quality Factor

The HALO thesis offers a compelling quality factor, but capturing its premium requires discipline. The market's search for shelter from AI-driven fragility has created a powerful tailwind, yet it also invites a classic trap: overpaying for perceived safety. The risk is that investors bid up the valuations of even modestly hard-to-replicate assets, eroding the very risk-adjusted returns the strategy seeks. This is where a rigorous checklist becomes essential.

A five-item framework can help avoid valuation traps. First, assess the asset's hardness: are the underlying networks, sites, or infrastructure truly expensive to replace? Second, examine demand stability: does the product or service represent an essential, non-discretionary need that customers cannot easily postpone? Third, scrutinize pricing power: can the firm pass through cost increases and raise prices incrementally without significant customer churn? Fourth, evaluate the balance sheet: does the company have the financial flexibility to navigate higher interest rates or weaker growth, given its capital-intensive nature? Finally, and most critically, analyze valuation: are you paying for predictable cash flows, or simply for the comforting narrative of low obsolescence? A business that fails two or three of these checks may be a solid company, but it is not the robust shelter the HALO thesis demands.

Regulatory and political uncertainty further sharpens the quality signal. In an environment of unstable rules and shifting trade policies, local, steady-demand businesses gain a distinct advantage over global, fragile ones. Their operations are often tied to domestic infrastructure or essential services, which tend to be more insulated from geopolitical friction and policy swings. This dynamic acts as a tailwind for the "you still need this on Monday morning" segment-waste collection, water utilities, and regulated power networks-where earnings are derived from persistent, local needs rather than volatile international trade flows.

Crucially, this shift is broadening beyond the mega-cap tech leaders. Small-cap leadership is spreading, indicating a market-wide re-rating. The year-to-date performance shows the Russell 2000 outpacing the S&P 500, a clear sign that the rotation is no longer concentrated in a handful of dominant names. This reflects the structural nature of the move: the search for asset hardness and steady demand is now a pervasive theme across market capitalization. For institutional portfolios, the takeaway is a dual mandate. First, overweight the new quality factor with conviction, but apply the HALO checklist rigorously to avoid paying a premium for a story. Second, recognize that the opportunity set is expanding, with small-cap businesses in industrial, service, and niche manufacturing sectors now participating in the re-rating. The goal is to capture the durability of the HALO premium while sidestepping the valuation traps that can undermine it.

Catalysts, Liquidity, and What to Watch

The forward path for the HALO thesis is defined by a powerful structural tailwind, a potential market misstep, and the practical mechanics of execution. For institutional capital, the setup is clear: a multi-year spending cycle is creating durable demand, while a selloff in software may offer a contrarian entry point for automation beneficiaries.

The primary catalyst is the $1.5 trillion AI infrastructure spending cycle by U.S. hyperscalers. This isn't a one-off investment but a sustained capital outlay that dwarfs their historical spending. It acts as a direct, multi-year tailwind for the capital-intensive sectors that supply this build-out-semiconductors, industrial equipment, and energy. The spending is already underway, providing a concrete, visible driver for earnings momentum in these areas. This structural cycle is the bedrock of the thesis, validating the market's flight to shelter.

A secondary catalyst is the current volatility in software. The recent "vomitorium" selloff, where many enterprise software names have fallen sharply, may present a conviction buy opportunity for long-term automation beneficiaries. As one analyst notes, companies like Toast and ServiceTitan have entrenched user bases and distribution networks that are unlikely to be disrupted by AI. Their core business models-providing essential tools to service industries-could see a material margin benefit from integrating AI to lower operational costs. The key watchpoint is whether the market's pessimism about the sector's three-year outlook is overdone. If the selloff creates a disconnect between these companies' durable fundamentals and their depressed valuations, it could signal a mispricing that favors a patient, long-term allocation.

Execution efficiency is paramount. The scale of the sector rotation demands a benchmark for liquidity. The SPDR S&P 500 ETF (SPY) trades an average of $54.94 billion daily, more than any other ETF. This unmatched liquidity provides a critical tool for institutional investors to efficiently re-weight portfolios without significant market impact. It allows for a smooth transition from capital-light to capital-intensive holdings, ensuring the strategic shift can be implemented at a low cost.

The bottom line for institutional strategy is to align with the structural cycle while navigating the tactical noise. The $1.5 trillion spending plan is a durable catalyst. The software selloff is a potential entry point for specific automation beneficiaries, but requires rigorous analysis to separate durable businesses from those facing genuine disruption. And SPY's liquidity offers the practical means to execute the rotation. The watch is on the spending cadence, the depth of the software correction, and the pace of capital flow into the new quality factor.