This is the whole point of the SLOE, and why its so valuable. I can tell you, at my rotation, a HP puts you in the top 1/3 of students that rotate. The SLOE reflects that, and shows a percentage of how many people get each grade. An Honors is meaningless from a rotation where 50% get Honors and 50% get HP. But if 10% get Honors, and 25% get HP, then either of those grades are very good and a pass there doesn't mean you are a bad student. Its all about the breakdown, and its why the SLOE has become so very important when screening applicants.
Not grading is even worse. Nothing is less objective than "everyone gets a pass". That only hurts candidates. Having a truly objective grading scale where faculty actually critically have to decide who the top 10, top 1/3, middle 1/3, etc candidates is extremely important.
Of note, nothing ticks me off more about grades/SLOES than when I read a SLOE writers SLOE and see their breakdown and it says something like:
Total SLOES written: 20
Top 10: 10
Top 1/3: 8
Mid 1/3: 2
Low 1/3: 0
Stuff like this drives me nuts as an clinical educator. How you can be a physician and not understand basic math is beyond me. It really hurts the students in the long run, because it makes them all just look like average students, and I'm sure some of them are truly standout ones.