In the latest Weekly, I asked if good news was good again.

The context was US stocks’ ascent to new records in the face of upbeat macro data, rising bond yields, fading odds of a March rate cut from the Fed and less aggressive pricing for aggregate 2024 cuts.

“In the absence of conclusive evidence that inflation is re-accelerating in earnest, good macro data is evidence to support the soft landing narrative, and that’s good for equities,” I wrote, summarizing a kind of generic, glass half-full view.

In the very next breath, I cast doubt on that view. “But that’s a bit unsatisfying when big-tech’s leading the charge,” I said. “If the early-year rally was a story about economic resilience and recession evasion, you might expect to see outperformance from short-duration shares, not long-duration ‘quality.'”

Fast forward two days and Morgan Stanley’s Mike Wilson touched on all of that in his latest.

“This past week, interest rates moved higher, yet P/E multiples rose, too,” he noted, before asking, “Is this divergence simply a delayed reaction on the part of valuations or is something finally changing with respect to the growth outlook?”

Suffice to say Wilson’s of the view that the growth picture remains indeterminate, and he thinks renewed outperformance for quality shares, the cap-weighted benchmark (over the equal-weighted index) and so on in 2024, represents a “reversion back to the classic late-cycle environment.”

“The equal-weighted S&P 500 has given up almost all of the relative performance it gained in November and December [and] it’s the same story for small-caps,” he said, in the course of calling the rally for lower-quality areas of the market into year-end 2023 “mostly a short squeeze and/or a performance chase.”

The figure illustrates the ebb and flow. The right-most annotation spells out Wilson’s view in just four words.

Having dismissed the late-year improvement in breadth / internals as a head fake, Wilson reiterated that we’re probably late-cycle, which he said is consistent with a soft landing, at least in some ways.

“The Fed is now expected to cut, which has lowered bond yields and raised equity valuations [and] strong returns for the S&P market cap-weighted index often tend to come between the last hike and the first cut,” he wrote, adding that “this is also typically an environment where quality growth stocks tend to outperform and dispersion is high.”

The figure speaks for itself, and if it doesn’t, the chart header serves as a summary.

Wilson made no secret of the fact that ambiguity around the macro remains acute. That said, he believes the trend is still towards slower growth and lower inflation, which means the Fed’s plans to ease this year likely won’t be derailed entirely.

In similar environments historically, “quality growth outperforms lower quality cyclicals, especially once the market starts to price Fed rate cuts,” Wilson said.

Summarizing his view around seven pages into a 40-page weekly, Wilson again suggested the rally in lower quality, economically sensitive areas of the market over the last two months of 2023 “was mainly driven by short covering” and thereby didn’t presage a “sustainable change in leadership based on a full reset in the cycle.”

That view, he went on, is validated by the fact that in 2024, “the laggards of 2023 are back to lagging and the winners are back to winning.”

For market participants, the read-through is simple enough: There’s a lot of uncertainty out there, and “when in doubt, it pays to go with the highest-probability winner,” as Wilson put it. If you ask Morgan Stanley, the highest-probability winner currently is high quality growth.