The trend of heavy asset stocks outperforming light asset stocks has persisted for over a year. However, in a recent report dated July 7th, Goldman Sachs' European equity strategy team indicates that the first phase of the HALO trade—valuation repair—is largely complete, and a second phase, driven by earnings delivery, has just begun.
What does this shift signify? Simply put, "HALO" stocks were previously bought for being cheap; they must now be supported by actual profitability. "HALO" stands for Heavy Assets, Low Obsolescence.
The HALO Trade—long heavy asset stocks (GSSTCAPI) and short light asset stocks (GSSTCAPL)—has gained approximately 20% year-to-date. Geopolitical shocks briefly disrupted but did not reverse this trade. Initially, the Goldman Sachs heavy asset basket (GSSTCAPI) fell about 7% following the outbreak of the US-Iran conflict, primarily due to its greater cyclical exposure to manufacturing and global trade. The decline was short-lived, and the basket now trades about 2% above pre-conflict levels.
More importantly, the geopolitical shock has reinforced the underlying logic of the HALO trade. Narratives around energy security and industrial autonomy have become clearer, directly benefiting oil & gas (about 10% of the basket) and utilities (about 10%), while the infrastructure sector has demonstrated resilience through inflation-linked mechanisms. The sole exception is Aerospace & Defense (about 10% of the basket), which has underperformed expectations despite a favorable geopolitical backdrop, attributed by Goldman to profit-taking after four strong years, though the medium-term outlook remains positive.
Valuation Gap Narrowed, But the Story Continues
Heavy asset stocks currently trade at a 12-month forward P/E of about 14.5x, while light asset stocks trade at about 16x—the valuation discount has narrowed significantly. This signals the near-completion of the first "valuation re-rating" phase, but it does not mean the trade is over.
There are three reasons for this. First, a clear positive correlation exists between capital expenditure and valuation—capital expenditure cycles closely track the relative valuation performance of heavy asset stocks. Each step-up in the capex-to-sales ratio has historically been followed by an expansion in the relative premium for heavy asset stocks. With the current capex-to-sales ratio at multi-year highs, further valuation support is implied.
Second, the high-interest-rate environment continues to pressure light asset stocks, particularly software and services companies, whose valuations rely heavily on distant future terminal value. Concurrently, the AI revolution makes it difficult to judge which business models will be disrupted, which technological paths will win, and how long current competitive advantages will last.
Third, the book value of many heavy asset companies may still not fully reflect the actual replacement cost of their assets in a high-inflation environment. In contrast, heavy asset firms possess physical networks and infrastructure with long construction cycles and high regulatory barriers, making them difficult to replicate quickly, which in itself forms a moat against disruption.
Transition to an Earnings-Driven Phase
The HALO trade is shifting from "valuation-driven" to "earnings-driven." For a long time, light asset companies led in EPS growth, the fundamental reason for their long-term outperformance. This pattern is now reversing.
Year-to-date, the heavy asset basket (GSSTCAPI) has seen the strongest positive EPS revisions among all European baskets; EPS revisions for the light asset basket have been near zero to slightly negative over the same period.
Market consensus expects heavy asset EPS growth of about 15-16% by 2026, compared to about 10% for light assets—the first significant reversal in many years. More critically, analysts note that "the next phase of outperformance does not require further valuation expansion, or even significant earnings upgrades. It just requires delivery." This implies a more intense divergence ahead, with outperformance concentrated among companies that can actually deliver on earnings expectations.
The AI Capex Super-Cycle
Underpinning the HALO logic is a capital expenditure expansion of rare scale. Global capex is forecast to grow about 13% in 2026, compared to a historical median of about 2%; expectations for 2027 continue to be revised upward. The capex-to-sales ratio is at its highest level in years, reversing a decade of systemic underinvestment.
A notable feature of this cycle is its high concentration. Data centers, semiconductors, utilities, and defense are expected to account for over 40% of total global capex in 2026, up from about 25% in 2022. Meanwhile, medium-term capex expectations for traditional sectors like chemicals, construction equipment, and airports remain relatively weak. This concentration itself is a structural signal—AI investment, energy transition, and re-industrialization are the core drivers, not simple inventory restocking or a cyclical rebound.
A Global, Not Just European, Phenomenon
Is the HALO trade only relevant for Europe? The answer is no. Goldman Sachs has constructed similar baskets in the US, Asia-Pacific, Japan, and emerging markets, observing highly consistent patterns: heavy assets outperform, light assets lag, and valuation gaps narrow globally.
Since 2022, heavy asset stocks in Asia-Pacific have gained 112% cumulatively, while light assets fell 15%; US heavy assets rose 71% versus 25% for light assets; European heavy assets gained 92% while light assets fell 2%; Japanese heavy assets rose 37% as light assets fell 7%.
Regional structural differences do exist. The weight of light asset sectors (especially large-cap tech) in the US market is far higher than in Europe, Japan, and some emerging markets. This partly explains the stronger relative performance in non-US markets year-to-date and suggests greater re-rating potential for HALO in markets with lower light asset weights.
Positioning and Fund Flows
On a tactical level, one risk to note is that the correlation between the HALO trade and the momentum factor has risen to historically high levels. This means heavy asset stocks could face short-term correction pressure if there is a factor rotation or systematic positioning adjustment.
From a longer-term perspective, however, fund reallocation is far from complete. Over the past 12 months, European value funds have seen net inflows of about 3% of assets under management (AUM), while growth funds have seen outflows of about 15% of AUM. Industrial, infrastructure, and commodity funds continue to attract inflows, while healthcare and consumer funds see outflows. Yet, the cumulative flow for European value funds relative to growth funds remains near a historical low of about -30%, indicating that despite recent shifts, a long-term underweight position is far from being corrected.
Regarding stock ratings, about 50% of the heavy asset basket currently has a Buy rating, with about 10% rated Sell. Buy ratings are concentrated around five key themes: Infrastructure (owning hard-to-replicate grids, pipelines, fiber networks, transport assets); Basic Materials (controlling core resources and industrial facilities for construction, manufacturing, and electrification); Aerospace & Defense (highly specialized manufacturing, long product cycles, rising geopolitical demand); Manufacturing & Consumer Platforms (large-scale production assets, distribution networks, enduring consumer demand); and Tech Physical Layer (hardware and infrastructure underpinning the digital economy, from semiconductor equipment to telecom networks). These themes share common traits: scarce physical assets, high barriers to entry, rising replacement costs, and limited technological obsolescence risk.
The Outlook for Light Asset Stocks
Are light asset stocks completely out of the game? The answer is no, but their situation has changed. The biggest impact of AI may not be margin compression but a decline in investor confidence regarding "terminal value." Uncertainty about which business models will be disrupted, which technologies will win, and the durability of current competitive advantages is more damaging to light asset companies, as a significant portion of their valuation derives from distant future cash flows.
In contrast, the physical assets, networks, and infrastructure owned by heavy asset firms are difficult to replicate and thus harder to disrupt. "Capital intensity itself has become a barrier against disruption." Furthermore, in areas with the strongest demand growth—power infrastructure, data centers, semiconductor equipment, defense—supply elasticity is extremely low, with new capacity requiring years of investment, approval, and construction. When demand rises and supply cannot keep pace, the pricing power, returns, and earnings visibility of existing assets improve.
Comments