Why the 'HALO' trade boosting hard assets is no fluke, according to Morgan Stanley

By Jamie Chisholm

The boost for nondigital sectors should last through the year, says Morgan Stanley's Wilson

Caterpillar has been one of the drivers of the Dow so far this year.

It's unlikely many investors thought the first six weeks or so of 2026 would produce this nugget: All of the "Magnificent Seven" stocks are lower for the year, and among the top three sectors by year-to-date performance, with a gain of 15%, is consumer staples XLP.

Of course, a much-cited reason for this divergence is fretting about whether mammoth AI spending can be justified for the likes of Meta Platforms (META), Microsoft (MSFT), Alphabet (GOOGL) and Amazon (AMZN), and also if such spending were to slow it could hit chip manufacturers, such as Nvidia (NVDA).

Meanwhile, software stocks have been badly hit by fears of AI-driven disintermediation. Despite a mild rally on Friday, the iShares Expanded Tech-Software Sector exchange traded fund IGV is still down 23.3% year-to-date.

Consequently, an important question for investors is to what extent the sectors that have gained most ground in 2026 - which also include top performer energy XLE, up 22%, and materials XLB, up 18% - have done so primarily because of their nondigital status.

Jay Woods of Freedom Capital Markets says the fact that those sectors are leading the market is not usually a good sign. "These sectors tend to lead near market tops, hence not 'good' leadership," he said.

This so-called HALO trade, the buying of hard/heavy assets with low obsolescence risk has helped the likes of Dow members Coca-Cola (KO), Caterpillar (CAT) and Johnson & Johnson (JNJ) hit record highs of late.

And the obvious danger may be that if AI-related tech were to start picking up steam again then the HALO trade may falter.

Mike Wilson, Morgan Stanley's chief U.S. equity strategist, says that is not likely to be the case for a number of reasons.

To start with, he notes, in an analysis published Tuesday, that while HALO stocks have indeed done well in recent weeks, their outperformance is not new. "For example, Multi-Industry and Materials/Metals have outperformed for months ... the high capex-to-sales factor has outperformed across the market since the middle of last year, supporting this theme," Wilson says.

And there are three drivers for this cohort that should provide it with a tailwind though 2026. One is cyclical: April 2025 marked the beginning of a new business and earnings cycle, as the median stock's capex growth is 10%, the strongest since 2023.

Another is structural, as materials and energy groups and the likes of Caterpillar benefit from the AI buildout. And finally there's policy, as the capex tax incentives from the One Big Beautiful Bill Act as well as his view that the Trump administration is attempting to rebalance the economy from overconsumption to greater investment, says Wilson.

He concludes that "Multi-Industry remains the best pure-playacross these themes." He doesn't specify but examples of multi-industry stocks, or conglomerates, are Honeywell (HON), Dover (DOV) and Johnson Controls (JCI).

"Regional Banks are an underappreciated winner amid a C&I [commercial and industrial] loan growth inflection," Wilson adds.

The State Street SPDR S&P Regional Banking ETF KRE has gained 10% this year.

The markets

U.S. stock-indices SPX DJIA COMP are lower at the opening bell on Wall Street as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is up, while oil prices (CL.1) slide on hopes for a U.S./Iran nuclear deal, and gold futures (GC00) are trading around $4,916 an ounce.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6836.17    -1.39%  -1.50%  -0.14%  11.80% 
   Nasdaq Composite                                                     22,546.67  -2.10%  -4.12%  -2.99%  12.58% 
   10-year Treasury                                                     4.03       -18.20  -19.70  -14.20  -45.00 
   Gold                                                                 4944.6     -2.75%  7.47%   14.14%  70.87% 
   Oil                                                                  63.46      -1.49%  7.16%   10.54%  -10.08% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

Warner Bros. Discovery (WBD) said it will reopen merger talks with Paramount (PSKY) as it also prepares for a shareholder vote on a bid from Netflix (NFLX).

Danaher (DHR), the healthcare company, is reportedly closing in on a deal to buy medical technology company Masimo (MASI) for nearly $10 billion.

Fiserv shares (FISV) are jumping after a report activist investor Jana Partners has built a stake in the fintech services company.

General Mills shares (GIS) are lower after the food group cut its annual sales and profit forecasts amid weak consumer demand.

U.S.-listed shares of Infosys (INFY) are higher after the India-based services company announced a collaboration with AI company Anthropic.

Norwegian Cruise Line shares (NCLH) are higher after the Wall Street Journal reported that Elliott has built a more than 10% stake.

Companies reporting earnings after the closing bell on Tuesday include Palo Alto Networks (PANW) and Devon Energy (DVN).

Germany-based Hapag-Lloyd (XE:HLAG) agreed to buy Israel's ZIM Integrated Shipping Services (ZIM) for $4.2 billion.

Federal Reserve governor Michael Barr will discuss AI and the labor market at 12:45 p.m.

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The chart

"While the last few weeks have been characterized by investor concerns about AI disruption, the software stocks at the center of those fears have generally reported earnings results that exceeded consensus expectations and drove analysts to lift forward estimates," says a team of Goldman Sachs strategists led by Ben Snider. Indeed, over the past three months, software stocks have plunged by 24%, but 2-year forward earnings estimates for the stocks have risen by 5%. "Given the rapid progress of AI technology, recent investor conversations have focused on the challenge of translating near-term profit strength to uncertain long-term growth outlooks," the Goldman teams adds.

Top tickers

Here were the most active stock-market ticker symbols on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   INFY    Infosys 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AMZN    Amazon.com 
   TSM     Taiwan Semiconductor Manufacturing 
   MSFT    Microsoft 
   AAPL    Apple 
   MU      Micron Technology 

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02-17-26 0931ET