Mid-Year Credit Outlook: Navigating the Crosswinds

Our latest outlook for credit markets, authored by my colleagues John Cortese, Rob Bittencourt, Akila Grewal, Shobhit Gupta, and Tal Barak Harif, is available here.

Key Takeaways

  • Tariff-driven headline risk, geopolitical volatility and fiscal policy shifts disrupted markets in the year’s first half—but failed to derail the credit cycle. Strong macro and corporate fundamentals, steady institutional demand and limited new supply helped anchor spreads. While downside risks have grown, fundamentals and technicals are expected to remain supportive through the end of the year.
  • The investment-grade bond market has become increasingly bifurcated, with most liquidity concentrated in a small set of recent issues, while older bonds trade infrequently and offer little spread pickup. This dynamic was put to the test during the volatility surrounding Liberation Day. For long-term investors, private credit may offer a better alternative—providing similar liquidity with higher spread compensation.
  • Global capital is rebalancing away from the US: In the wake of the geopolitical tensions and US domestic policy shifts during the first half of the year, early signs of capital rotation out of US assets may be starting to emerge. Sovereign funds and central banks are reallocating toward Europe—fueling strong inflows into the region’s equity and credit markets.
  • Europe’s private credit market is large, underpenetrated and gaining momentum. Non-bank lending accounts for an estimated 12% of corporate financing versus 75% in the US. Structural tailwinds—regulatory reform, fiscal stimulus and favorable pricing—are creating a scalable growth opportunity, positioning Europe as a key market for direct lending.
  • The generative AI boom is no longer just an equity story—it’s increasingly being financed through credit. Hyperscalers are issuing billions to fund data centers, while early-stage AI firms are tapping debt markets to scale. As capex soars and adoption accelerates, credit investors are helping fund the physical backbone of the AI economy.

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Significant Private Credit Opportunities in Asia

The total addressable market for direct lending to large-cap companies in Asia is enormous. Eighty-seven percent of firms in Asia with revenue greater than $100 million are private, see chart below.

Asia: 87% of firms with revenue greater than $100 million are private
Note: For companies with last 12-month revenue greater then $100mn by count. Sources: S&P Capital IQ, Apollo Chief Economist

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Mid-Year Credit Outlook: Navigating the Crosswinds

Resilient fundamentals and robust technicals drove credit performance in the first half of 2025. Despite tariff headlines, geopolitical tensions, and policy volatility, credit held firm. Solid fundamentals, strong demand, and limited new supply helped anchor spreads. We expect these supportive dynamics to persist through year-end.

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Key Takeaways

  • Tariff-driven headline risk, geopolitical volatility and fiscal policy shifts disrupted markets in the year’s first half—but failed to derail the credit cycle. Strong macro and corporate fundamentals, steady institutional demand and limited new supply helped anchor spreads. While downside risks have grown, fundamentals and technicals are expected to remain supportive through the end of the year.
  • The investment-grade bond market has become increasingly bifurcated, with most liquidity concentrated in a small set of recent issues, while older bonds trade infrequently and offer little spread pickup. This dynamic was put to the test during the volatility surrounding Liberation Day. For long-term investors, private credit may offer a better alternative—providing similar liquidity with higher spread compensation.
  • Global capital is rebalancing away from the US: In the wake of the geopolitical tensions and US domestic policy shifts during the first half of the year, early signs of capital rotation out of US assets may be starting to emerge. Sovereign funds and central banks are reallocating toward Europe—fueling strong inflows into the region’s equity and credit markets.
  • Europe’s private credit market is large, underpenetrated and gaining momentum. Non-bank lending accounts for an estimated 12% of corporate financing versus 75% in the US. Structural tailwinds—regulatory reform, fiscal stimulus and favorable pricing—are creating a scalable growth opportunity, positioning Europe as a key market for direct lending.
  • The generative AI boom is no longer just an equity story—it’s increasingly being financed through credit. Hyperscalers are issuing billions to fund data centers, while early-stage AI firms are tapping debt markets to scale. As capex soars and adoption accelerates, credit investors are helping fund the physical backbone of the AI economy.

DOWNLOAD THE PAPER

The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.


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Extreme Concentration in the S&P 500 Continues

The chart below shows the biggest stock by market cap in the S&P 500, and it confirms the extreme AI concentration in the market today. Nvidia now has the biggest weight in the S&P 500 of any individual stock since the data began in 1981.

The weight of the biggest stock in the S&P 500
Sources: Bloomberg, Apollo Chief Economist

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Stagflation Theme Continues

ISM Services Prices Paid for July shows that inflation pressures in the service sector are intensifying, pointing to upside risks to CPI inflation over the coming months, see chart below. 

At the same time, employment growth is slowing down and the unemployment rate is rising. 

The sources of this stagflation impulse are tariffs, deportations and the depreciation of the dollar. 

This is a problem for the Fed. Should the FOMC focus on rising inflation and hike rates, or on slowing growth and cut rates? 

The market is clearly expecting cuts, but the upside risks to inflation are significant, and investors should be carefully watching survey-based and market-based measures of inflation expectations. 

The bottom line is that the stagflation theme in markets is intensifying. 

For more discussion, see our mid-year outlook from June here.

Inflation pressures intensifying
Sources: Institute for Supply Management (ISM), US Bureau of Labor Statistics (BLS), Macrobond, Apollo Chief Economist

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Immigration Restrictions Will Lower Household Formation

Household formation could decline by 50% from 2024 to 2026 due to deportations and immigration restrictions, see chart below and the Daily Spark here.

A significant decline in household formations has important implications for consumer spending, housing demand and home prices.

Immigration restrictions are a headwind to household formation
Note: Household formation estimates for 2025 and 2026 are based on projected natural population growth and legal immigration. We assumed unauthorized immigration drops to zero. To reflect this, we used natural population growth plus 65% total net migration—based on CBO estimates and Migration Policy Institute’s estimates of 0.9 million rise in unauthorized immigrants in 2023—divided by the average US household size. Sources: Census Bureau, Haver, Apollo Chief Economist

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Understanding the Hong Kong Dollar Peg

We expect that the Hong Kong dollar peg will hold. The Hong Kong Monetary Authority (HKMA) has large reserves to intervene, and the peg is a cornerstone of Hong Kong’s success as a global financial center.

But there are pressures on the Hong Kong dollar peg. After Liberation Day, the US dollar depreciated significantly. As a result, capital started flowing into Hong Kong, and the Hong Kong dollar appreciated so much that it reached the strong limit of the trading band relative to the US dollar.

In response, a few weeks after Liberation Day, the HKMA lowered Hong Kong interest rates to zero. As a result, there is now a significant gap between interest rates in the US and in Hong Kong, which is putting pressure on the peg because investors can now borrow in Hong Kong dollars and invest in US dollars, earning a significant return as long as the peg holds.

This has increased discussion among macro investors about the Fleming-Mundell policy trilemma, which says that a country cannot simultaneously have 1) a fixed exchange rate, 2) free capital movement and 3) an independent monetary policy.

The bottom line is that we expect the Hong Kong dollar peg to hold. But investors should be aware of the mounting pressures, as abandoning the peg would have significant implications for global markets.

We put together a chart book to understand this topic better, and it is available here.

Overview of the current situation
Note: All references to Hong Kong refer to the Hong Kong SAR, China. Source: Apollo Chief Economist
Outlook for the Hong Kong dollar

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