The HALO framework - which elevates companies with substantial physical assets and low obsolescence risk over software and other asset-light businesses - has come under pressure since the outbreak of conflict in Iran. The approach, which helped lift industrials and materials into the top ranks of S&P 500 valuations by emphasizing industries perceived as less exposed to AI disruption, depended on expectations of faster economic growth and tighter commodity availability.
Those expectations were destabilized by the war in Iran, creating uncertainty around the HALO thesis. Market participants have responded by trimming crowded long positions and marking down earnings forecasts. According to available reports, both industrials and materials have seen downward revisions to first-quarter profit estimates since the conflict began, and industrials' expected profit growth now trails most peers in the S&P 500.
Market positioning data cited from JPMorgan's market intelligence desk indicates a notable shift in sentiment toward industrials: short exposures in the sector rose 24% month-to-date, while long exposures climbed just 6% in the same period. At the same time, asset-light companies benefited as markets recovered following the US-Iran ceasefire, drawing investor interest away from the HALO-identified winners.
In contrast to the strains on heavy-asset sectors, semiconductor stocks have retained strength. The report notes that semiconductors, which are viewed as the physical infrastructure underpinning AI and that have been supported by a capital expenditure cycle, have outperformed and reached levels above their dot-com-era peak.
The unfolding developments illustrate how a geopolitical shock can challenge an investment strategy built on specific macroeconomic and commodity assumptions. The HALO trade's reliance on accelerating growth and constrained commodity supply has been tested by the conflict-related disruption to those assumptions, translating into both positioning changes and earnings estimate downgrades within the affected sectors.
Summary
- The HALO trade, which favored heavy-asset sectors deemed less vulnerable to AI, has been disrupted by the war in Iran.
- Both industrials and materials have seen downward revisions to first-quarter profit estimates since the conflict began.
- Short interest in industrials rose 24% month-to-date while longs increased 6%, and asset-light firms gained after the US-Iran ceasefire; semiconductors have remained strong.
Key points
- HALO strategy under strain - Investors reassessing positions in industrials and materials as core macro and commodity assumptions are challenged.
- Market positioning shift - JPMorgan data shows a sharp rise in shorts relative to longs in industrials.
- Sector divergence - Semiconductors continue to perform strongly despite weakness in heavy-asset sectors.
Risks and uncertainties
- Geopolitical uncertainty - The war in Iran has created doubt around growth and commodity-scarcity expectations that underpinned the HALO trade, affecting industrials and materials.
- Earnings revisions - Continued downgrades to first-quarter profit estimates for industrials and materials could weigh on sector performance.
- Positioning volatility - Rising short interest in industrials signals potential for further market volatility in that sector.