The risk of an economic slowdown now outweighs the risk of inflation, according to Morgan Stanley. At the midpoint of the year, stocks are near all-time highs, buoyed mostly by a handful of megacap technology stocks tied to the artificial intelligence trade. The S & P 500 has surged nearly 15% this year, having notched more than 30 record closes along the way. But Morgan Stanley worries that the poor breadth of the market , measuring the number of advancing stocks against those declining, is a sign that slowing economic growth is becoming a bigger risk than stubbornly high inflation. As evidence, the Wall Street investment bank is citing downside surprises in recent macroeconomic data. “With macro data broadly coming in softer YTD, many lower quality and economically sensitive areas of the market have lagged, while a narrow list of higher quality mega caps have carried performance,” wrote Mike Wilson, equity strategist at Morgan Stanley. “In our view, this is a sign the market is becoming more focused on growth softening and less focused on inflation and [interest] rates,” Wilson said. While the relatively tech-heavy S & P 500 and Nasdaq Composite have surged nearly 15% and 17% this year, respectively, the Dow Jones Industrial Average, which is far less exposed to the AI theme, is up close to 5%. Meanwhile, the Russell 2000 has also lagged. The small-cap index has gained just 0.5% in 2024. “This backdrop syncs with our long-standing view that the current policy mix of heavy fiscal and higher front end rates is effectively crowding out many economic participants,” Wilson wrote. To be sure, the Morgan Stanley strategist does not expect weak breadth to herald weak returns. But he does expect any market broadening will for now be restricted to high-quality, large-cap and defensive stocks, especially in the event of a slowdown that he expects is the most likely future scenario. “A growth scare that is substantial enough to turn bad economic data into bad news for equity [price-to-earnings] multiples across the board,” Wilson said. “We think this is the most likely risk, and our conversations with clients echo this view.” Here are some of the quality large-cap and defensive stocks with strong upward earnings revisions that can outperform, according to Morgan Stanley. These stocks are in the top 1,000 stocks by market cap and score in the top one-third of composite, high-quality composites readings. Burlington shares are higher by 25% this year, and the stock is overweight-rated by Morgan Stanley. On Monday, a Bernstein note said off-price retailers like Burlington will continue to outperform the retail sector. “We expect BURL to steadily improve margins and ROIC on new stores, as well as margins in the existing business from better buying and supply chain processes — we model ROIC reaching 10% by 2026,” the firm’s Aneesha Sherman wrote. Monster Beverage emerged on Morgan Stanley’s list. The overweight-rated stock is down by more than 14% this year. A Jefferies note this month called Monster Beverage one of the firm’s top picks in a bifurcated consumer economy, saying the brand has the “least exposure to trade-down & private label.” Nvidia and HubSpot also surfaced on Morgan Stanley’s screen.