By one measure, it’s been decades since stock traders were willing to pay so much for the strongest companies out there -- just as credit investors rush to the weakest balance sheets.

U.S. firms with solid financials now trade close to the highest valuation relative to their fragile peers since the dot-com era of 2003, according to Goldman Sachs Group Inc. indexes.

Juxtaposed against falling premiums on speculative-grade bonds to power the best start to a year since 2009, it suggests beneath the surface of the S&P rally that equity and debt investors are placing opposing bets on the business cycle.

How long the divergence can last is anyone’s guess. But one thing’s for sure: There are no shortage of Wall Street voices touting quality stocks to buffer portfolios from a market meltdown, including the likes of JPMorgan Asset Management and Northern Trust Asset Management.

At Kempen Capital Management NV, Roelof Salomons is riding both sides of these seemingly helter-skelter markets. He’s holding onto stronger equities while bidding up high-yield debt in a tactical bet on Goldilocks.

“We’re in this twilight zone of low growth, low inflation and low rates,” he said. “This benefits companies that have long duration because bonds aren’t moving anywhere. Growth won’t slow to the extent that we’ll have a recession but it’ll be slow. In this scenario, you want to own defensive equities.”

Safe Space

Sure, dovish monetary projections, benign technicals and low defaults can justify the rush for junk credit in concert with defensive wagers in stocks and Treasuries. But something has to give within the next six months at the latest, reckons Salomons. Either rates go up or growth craters, hitting levered assets along the way, according to the Amsterdam-based investor.

For now, the hunt for safety in equities goes on. Bank of America’s February fund manager survey shows angst over corporate debt is the highest since 2009. Traders have sunk some $1.85 billion into the iShares Edge MSCI USA Quality Factor ETF this year.

“Investors place higher scrutiny on leverage as we approach the end of the cycle and companies with stronger balance sheets are often preferred even if they are more expensive,” said Vincent Juvyns, a global market strategist at JPMorgan Asset Management.

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