Morgan Stanley said that the stock market will face high growth and high inflation in the future, "not landing" stuffed noodles

• U.S. stocks are eyeing a "no landing" scenario for the U.S. economy, according to Morgan Stanley.

• Under these circumstances, the U.S. economy will continue to grow at a high rate and inflation will continue.

• Cyclical sectors such as energy and materials performed well, signaling the beginning of expanding leadership.

Morgan Stanley (Morgan Stanley) said the stock market has stopped arguing about soft and hard landings and has begun to accept the view that the U.S. economy will not land.

Morgan Stanley's Michael Wilson and his team said in a note to clients on Monday that investors have abandoned the "soft landing" view that seemed so likely just a few months ago. In this scenario, inflation will continue to fall and the U.S. will enter a short, shallow recession.

However, this view was compounded by a string of optimistic data: in March, the US unemployment rate fell to 3.8%, the ISM manufacturing index was strong, and personal consumption expenditures rose at an annualized rate of 2.5%, the Fed's preferred inflation gauge.

"Macro data and stock market leadership have begun to support a non-landing outcome, with recent growth data points exceeding most forecasters' expectations and inflation data remaining a bit stickier than expected," he wrote in the report.

Wilson emphasized the expanding leadership of the stock market, as evidenced by the outperformance of cyclical sectors such as energy and materials so far this year, which he said supports the view that "the stock market is beginning to process a better growth environment.

The diversification of stock market leadership contrasts sharply with last year's AI-driven tech surge, but Wilson cautions that while cyclically sensitive stocks and sectors have strong momentum, it's important to maintain quality.

"If the latter scenario holds true, investors will see continued outperformance from low-quality cyclicals and small cap stocks," he added.

The stock market has been on a roller coaster ride as it reacts to developments in the macro environment. Over the past year, the consensus view has swung between expectations of a soft or hard landing.

Strategists also emphasized the importance of the 10-year U.S. Treasury yield as a key indicator of the market's sensitivity to macroeconomic conditions, saying that small-cap and low-quality stocks are more sensitive to changes in interest rates than large-cap stocks.

"If we see 10-year Treasury yields continue to rise above 4.35-4.40, interest rate sensitivity could increase more broadly, but we still expect Big Rock quality stocks to perform relatively well," they added.

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