More than 50% of debt for Russell 2000 companies is floating rate. For the S&P 500, it is 24%, see chart below. With interest rates higher for longer, small-cap companies remain more vulnerable than large-cap companies.
More generally, companies and capital structures with no earnings, no revenues, and no cash flows will continue to struggle with high debt servicing costs.
The bottom line for both equity and debt investors is to invest in companies that have earnings.
Our chart book discusses the outlook for India. There are many reasons to be bullish. GDP growth is strong, inflation is low, and sentiment surveys show that consumers and firms are upbeat. Household, corporate, and bank balance sheets are healthy. The financial sector has seen significant transformation with digitalization and bankruptcy law enactment. Bank lending has been solid, and the Indian stock, bond, and private markets continue to grow at a rapid pace.
This week we got data for retail sales for September and the first two weeks of October, and it shows that the US consumer continues to do well, driven by solid job growth, strong wage growth, and high stock prices and home prices, see the first two charts below.
With the Atlanta Fed GDP estimate for the third quarter currently at 3.4%, the bottom line is that the expansion continues, see the third chart.
Why is the incoming data so strong? Because the list of tailwinds to the economy keeps growing:
1) A dovish Fed
2) High stock prices, high home prices, and tight credit spreads
3) Public and private financing markets are wide open
4) Continued support to growth from the CHIPS Act, the IRA, the Infrastructure Act, and defense spending
5) Low debt-servicing costs for consumers with locked-in low interest rates
6) Low debt-servicing costs for firms with locked-in low interest rates
7) Geopolitical risks easing
8) US election uncertainty will soon be behind us
9) Continued strong spending on AI, data centers, and energy transition
10) Signs of a rebound in construction order books after the September Fed cut
These 10 tailwinds are increasing the likelihood that the Fed will have to reverse course at its November meeting.
In short, the no landing continues.
See our chart book with daily and weekly indicators for the US economy.
Looking at the historical relationship between the S&P 500 forward P/E ratio and subsequent three-year returns in the benchmark index shows that the current forward P/E ratio at almost 22 implies a 3% annualized return over the coming three years, see chart below. In other words, when stocks are overvalued like they are today, investors should expect lower future returns.
Listen to Apollo Chief Economist Torsten Slok and Jess Lipsey, a Partner in the Real Assets Group at Apollo, discuss their views on what might come next for real estate in general and real estate equity in particular, in the wake of an aggressive rate cut by the US Federal Reserve.
Foreigners hold a significant amount of US stocks and fixed income, and the composition of their holdings has changed dramatically since the financial crisis, see chart below.
Today, 58% of US financial assets held by foreigners are equities. In 2010, 33% of financial assets held by foreigners were equities.
For corporate credit, the share has declined from 15% to 8%.
The bottom line is that foreigners are significantly overweight US equities and significantly underweight US credit.
There are two categories of spending in the federal budget process, discretionary and mandatory.
Discretionary spending is subject to the appropriations process, and mandatory spending includes entitlement programs, such as Social Security and Medicare.
The share of government spending on mandatory spending has increased from 30% to 60%, thereby giving politicians less room to achieve a balanced budget without cutting entitlements.
Companies with no earnings, weak revenues, and weak cash flows underperform when interest rates stay higher for longer because they are not able to pay their higher debt servicing costs, see chart below.
Eighty-nine percent of US government debt outstanding is fixed rate and 22% are bills, 50% are notes, and 17% are coupons, see chart below.
US households have experienced significant gains in stock prices and home prices over the past 15 years, and Fed hikes have generated significant cash flows to owners of fixed income.
As a result, the debt-to-income ratio looks much better for US households compared with other countries, including Canada and Australia, see the first chart below.
At the same time, credit card debt for US households is at very low levels and declining, see the second chart.
The bottom line is that US household balance sheets are in excellent shape.
Combined with strong job growth, solid wage growth, rising asset prices, and the Fed cutting rates, there is no recession on the horizon.
