The dramatic rotations in US equities witnessed over the past couple of weeks are primarily a positioning shakeout and don’t suggest a regime shift in favor of lower-quality names.

That’s according to Morgan Stanley’s Mike Wilson, whose latest weekly largely reiterated familiar talking points.

“We have long been in the camp that large-cap quality has been the place to be for equity investors as opposed to diving down the quality and cap curves,” he said Monday. “That continues to be the case.”

Do note: July’s shaping up to be the best month for US small-caps versus big-cap tech since 2002.

As the figure above suggests, you’re witnessing history this month in ~1,300bps worth of small-cap outperformance.

Plainly, that pace isn’t sustainable. But the juxtaposition between AI euphoria (bullish for the mega-cap leadership) and onerous rates (bearish for small-caps) drove big-tech relative performance to eye-watering extremes, suggesting, perhaps, more room for the reversal to run.

Wilson doubts it, though. “We think most of this rotation is due to the de-grossing that is occurring within portfolios that are overweight large-cap quality growth and underweight lower quality and smaller-cap names,” he said, adding that “in a later-cycle economy where growth is softening and/or not translating into earnings growth for most companies, narrowness within the equity market is to be expected.”

The simple figures above — and the balance of the data more generally — are indicative of a late-cycle environment, Wilson insisted. That doesn’t favor small-caps, nor lower-quality equities.

If you must dabble, Wilson reiterated that small-cap growth (versus value) is the way to go. “Growth equities should benefit from a cost of capital standpoint as the Fed cuts and are not as adversely exposed to the reason why the Fed is able to cut — falling pricing power,” he wrote.

This is a big week for big-tech. Wilson emphasized that “at this stage of the economic and market cycle,” as investors prepare for rate cuts, “secular growth themes often become driving forces of valuation.”

I take his point, but large-cap quality is undergoing a trial by fire as investors’ patience wears thin vis-à-vis return on tens of billions in AI capex. As BofA’s Ohsung Kwon put it, we’re “moving from a ‘tell me’ story on AI to a ‘show me’ story.”