UBS Equities-Global Strategy _US credit outlook 10 key themes for multi-...-115230338

ab6 May 2025Global ResearchPowered byUBS Evidence LabYESGlobal StrategyUS credit outlook: 10 key themes for multi-asset investorsOn balance, the US credit outlook hinges on the severity and timing of tariffs and the related recession risks. Rear-view fundamentals appear resilient, with credit cracks contained and market functioning quickly normalizing. Technicals are self-correcting as outflows are easing while forward issuance projections fall further. The main risk is for a hard landing in Q3 because valuations are now largely priced for a soft one that requires material tariff de-escalation.1. Tariffs: what’s priced into credit? US IG/HY spreads (102, 351bp) look priced closer to our upside scenario (China tariffs cut to 60%, reciprocal tariffs largely rolled back) where default rates remain near 1% and IG/HY spreads trade in a 90-100/300-350bp range in Q2-Q4. Conversely, in Scenario 2 (China cut to 60%, reciprocal tariffs stand) we see defaults rising to 2-3% and US IG/HY spreads trading in 115-130/ 425-500bp ranges in Q2-Q4. Across IG/HY sectors those that have been most defensive to tariffs include wirelines, consumer non-cyclicals, and HY aerospace/defense (Figures 1-3).2. Earnings: how are EPS revisions trending? Q1 earnings for large caps were relatively in line with trends in recent quarters, with 69% of S&P 500 companies beating and EPS on pace for 10% growth. But most of this is pre-tariffs; earnings revision ratios fell deeply negative following tariff announcements for large and small cap. However, the initial reaction in 2025 revisions appears to be moving less negative now while 2026 numbers look to have stabilized at the lows (Figure 4). We continue to expect downward revisions through the year, possibly at a slower pace depending on policy and macro catalysts.3. Asset quality: are we seeing credit cracks? On balance fissures look contained: CRE delinquencies have risen moderately for multifamily/lodging, but are off the highs in office. Corporate ratings downgrades have ticked up, but in LL portfolios this is mainly leading to a rise in B-/B3 exposures (not CCCs). Private bankruptcy filings through early May are declining, and in key sectors we see some pressure in services/healthcare but little in tech (Figures 5-7). 4. Energy: how vulnerable is credit to lower oil prices? Structurally energy exposure is much lower than in 2015-16: IG/HY energy market shares are 33-37% off peak levels, and stronger credit quality has led to lower betas vs. benchmarks. That said, WTI remains above prices needed to cover operating expenses ($26-45) but is below breakevens on new wells ($61-70). IG/HY energy are underperforming and we remain cautious as OPEC's production ramp-up/ tariffs could push WTI prices near $50.5. Spreads and recessions: when and where do they peak?Performance is far from uniform, but excluding cycles with high/rising default rates before the recession (1981, 2001) the overall takeaway is spreads are resilient even 3-4mos