Stocks’ interpretation of market pricing for Fed cuts in 2024 may lack sufficient nuance.

That was the message from one of the Street’s most recognizable equities strategists on Tuesday.

When we talk about what’s “priced in” in terms of the rates trajectory, we often (in some sense because clarity and brevity demands it) put “too much weight [on] the aggregate pricing as opposed to thinking about the underlying set of probabilistic outcomes,” as Morgan Stanley’s Mike Wilson put it.

In short, 150bps of “priced-in” cuts (for example) could mean any number of things. It reflects a veritable constellation of prospective macro-policy permutations and, crucially, the odds traders assign to them. As Wilson wrote, the “aggregate pricing is easily observable [but] it tells us little about the probabilistic assumptions that underpin it.”

As the figure above shows, stocks re-rated in lockstep with the evolution of Fed funds pricing for 2024. The annotations were a little blurry in Wilson’s original, but the light blue line is the S&P’s forward multiple, and it’s inverted. The dark blue line is December 2024 Fed funds. The more “cuts” priced (and the scare quotes are there as a nod to the nuance mentioned above), the higher the equity multiple.

Wilson worries stocks don’t understand the subtleties, don’t care or, more likely, both. If that’s true, it wouldn’t be the first time equities overlooked key nuance.

“[T]he forward curve reflects a more nuanced view of the future rather than a singular defined [Fed] outcome,” he wrote. “It’s more a function of a probabilistic distribution of outcomes that have different implications for stocks.”

Not all of those implications are good. Not all of them are bad either. And contrary to what you might be inclined to believe from scanning mainstream media headlines, Wilson isn’t overtly bearish for 2024.

His point on Tuesday, rather, was just that equities (or at least multiples) may be blindly following an aggregate — following “the cuts,” so to speak — without any regard for what that aggregate actually represents.