Monthly Checkpoints

U.S. high yield credit spreads have widened year to date, reflecting greater investor caution about perceived default risk. The move also raises concerns about possible credit contagion. However, because spread widening has been concentrated in the lowest-quality issuers rather than higher-quality issuers, we don’t anticipate broader market stress.

Change can be difficult to navigate, especially when its principal agent explicitly rejects prevailing norms. Less than five months into the job, Federal Reserve (the Fed) Chair Kevin Warsh has put investors in that position, which makes charting the course of monetary policy complicated.

Higher inflation and elevated interest rates typically weigh on corporate profitability, yet corporate margins continue to climb to record highs. While that strength is evident both in the U.S. and abroad, U.S. outperformance versus Europe is now the widest on record. Stronger margins have helped contribute to better-than-expected earnings and reinforce U.S. equity leadership. The question now is whether that strength can persist?

Higher interest rates have become a frequently cited risk to corporate earnings and the economy. The conventional thinking is straightforward: when borrowing costs rise, companies face higher interest expenses, profits come under pressure, and economic growth slows. While there is truth to that relationship, the current cycle may differ from investors’ expectations.