Why We Think Corporate Health Can Withstand an Economic Slowdown
Corporate fundamentals have been deteriorating in the US. Over the past six months we have seen meaningful erosion in profit margins, pricing power and the outlook for credit. The dropoff has been particularly steep in manufacturing industries. Our conclusion is based on work done by our analysts who closely follow the financials of more than two dozen industries as well as from our top-down macro research.
The US economy has been slowing, as one might expect in the late stages of an economic cycle. Signs indicating financial markets are concerned about that slowdown have not been hard to spot. The price of copper, a commodity tightly tied to the economic outlook, has fallen sharply. Yields on 10-year Treasurys have declined below yields on two-year Treasurys. And the stock market, as measured by the S&P 500, had its worst first half since 1970.
Corporations appear in a good position to weather a downturn
In our view, the market’s concerns are well-founded. The slowdown is real and we expect it to continue. Even so, we believe that corporations are in a good position to weather a downturn. Credit fundamentals will likely weaken but we do not expect them to break down or reach crisis levels.
Our view rests on a few key foundations: