SALES & TRADING COMMENTARY (NOT A PRODUCT OF MORGAN STANLEY RESEARCH) FOR INSTITUTIONAL USE ONLY MS Baskets | Managing Your Beta Hedges – SPX & NDX Update: Following last Friday’s quarterly rebalance, concentration levels across major indices remain elevated with the Mag7 accounts for 33% of SPX and 41% of NDX. The narrative on the Mag7 has shifted this year with none of the Mag7 in the green and MSXXMAG7 down 11-12% YTD. Despite the relative underperformance, clients using SPX/NDX as beta hedges are essentially taking short positions on a handful of names. During this time last year, the markets reacted similarly while pricing anticipated tariff impact, leading to a meaningful relative underperformance of the Mag7. However, once investor digested the new order, the group relatively outperformed aggressively. For clients that think the moves may be overdone, rotating to a equal weighted versions excluding Mag7 or AI may make sense. However, the counter thesis suggest these names may continue to be funding shorts to Semis, Memory, and emerging IPO pipeline. Despite heightened geopolitical volatility in the middle east, the AI theme remains insulated from macro pressures. The AI trade drove index gains last year and this year is serving as a defensive pillar preventing further market drawdowns. MSXXAI is comprised of 45% AI Power, 45% AI tech (Semis/hardware), 10% Hypersaclers, and the basket is up ~15% YTD. One would expect the ex AI replacements to be significantly underperforming given the AI strength, however, cyclicals have provided support to the benchmarks, specially SPX which got a heavier tilt towards capital goods & energy names. Conversely, MSXXQEAI (NDX equal weight ex AI) is relatively underperforming driven by a heavier software tilt. [cid:image001.png@01DCBB94.15BC5410] [cid:image002.png@01DCBB94.15BC5410] [cid:image003.png@01DCBB94.15BC5410] Source: Bloomberg, MS Swaps Ticker Description Type W. Mkt Cap (mm) MTD YTD SPY SPDR S&P 500 ETF TRUST Equity $ 1,240,617 -5.45% -4.89% MSXXSPX7 S&P 500 ex Mag7 Index $ 241,724 -6.11% -1.58% MSXXSXAI S&P 500 ex AI Index $ 316,728 -6.64% -2.45% RSP EW S&P 500 Equity $ 116,507 -7.07% -0.56% MSXXSPE7 EW S&P 500 ex Mag7 Index $ 79,819 -7.24% -0.83% MSXXSEAI EW S&P 500 ex AI Index $ 81,165 -7.41% -1.47% QQQ Nasdaq 100 Equity $ 1,428,230 -4.15% -5.25% MSXXQX7 Nasdaq 100 ex Mag7 Index $ 199,383 -4.01% -0.63% MSXXQXAI Nasdaq 100 ex AI Index $ 139,352 -5.64% -4.60% MSXXQQQE EW Nasdaq 100 Index $ 346,238 -5.15% -3.53% MSXXQE7 EW Nasdaq 100 ex Mag7 Index $ 123,144 -5.20% -2.64% MSXXQEAI EW Nasdaq 100 ex AI Index $ 142,677 -6.25% -6.19% MSXXMAG7 Mag7 Index $ 2,798,907 -5.05% -11.62% Source: Bloomberg, MS Swaps [cid:image004.png@01DCBB94.15BC5410] We are here to help. Please let me know if you have any questions. Best, Luiz Luiz Ribeiro, CFA | Executive Director Morgan Stanley | Institutional Equity Division 1585 Broadway, 5th Floor | New York, NY 10036 Phone: +1 212 761-5615 Luiz.Ribeiro@morganstanley.com<mailto:Luiz.Ribeiro@morganstanley.com> ________________________________ NOTICE: Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. If you have received this communication in error, please destroy all electronic and paper copies and notify the sender immediately. Mistransmission is not intended to waive confidentiality or privilege. Morgan Stanley reserves the right, to the extent permitted under applicable law, to monitor electronic communications. 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