"AI" Factor Reversal: Why Wall Street is Selling Off Tech Growth Stocks and Turning to Traditional Value Stocks

Traditional “Quality” Stocks Decline as AI Threatens Industry Moats

Quantitative strategies managing trillions of dollars in global capital are facing a historic identity crisis. As artificial intelligence reshapes the economic landscape, the long-standing definitions of “safe” and “expensive” stocks are being overturned.

In February, the “quality” factor, typically a safe haven for high-margin companies like Microsoft (NASDAQ:MSFT), lagged behind “value” stocks by over 5 percentage points. This was the worst performance of quality index stocks in five years.

As this shift occurs, investors are becoming cautious about high-valuation companies that were once protected by broad competitive moats. There is growing concern that AI could overnight erode these moats, rendering traditional software and service-based business models obsolete.

Therefore, professional fund managers are shifting from “future growth” tech stocks to stocks with strong current fundamentals. Companies with tangible infrastructure, such as Coca-Cola (NYSE:KO) and utility providers, are regaining favor. Investors now prioritize assets with lower technological substitution risks.

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Momentum Distortion as Investors Chase “Halo” Assets

“Momentum” trading, which involves following the market’s top performers, is also sending warning signals. According to analysts at Man Group, recent market winners show little correlation with traditional earnings revisions.

Instead, the main driver of rising stock prices has become the perception that these companies can withstand the AI revolution or are useful in the AI era. This has led to “HALO” trades (heavy assets, low淘汰率), with power grids, pipelines, and semiconductor manufacturers viewed as new defensive core stocks.

Adding to the volatility, a recent viral “thought experiment” on AI’s impact on white-collar jobs has caused turbulence in the tech sector. The report led to IBM’s largest decline in 25 years and pushed software stocks to new lows.

With uncertainty reaching historic highs, the willingness to make long-term bets has vanished. Exchange-traded funds (ETFs) focused on immediate cash returns, dividends, and buybacks attracted $7 billion in inflows just this month. As one chief investment officer noted, the market has essentially become a concentrated AI risk portfolio.

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