- UBS strategist Francois Trahan points out U.S. corporate debt has surged by 50% over the past decade and now stands near $10 trillion.
- Such a jump in corporate debt would be more worrisome had it not been for the steep drop in yields, he says.
- But these concerns could be front and center in 2020 as slowing economic activity and a potential fall in corporate earnings could lead to debt downgrades for companies such as Amazon, 3M and Walmart.
This decade’s surge in corporate debt could pressure stocks in 2020 as corporate earnings slow to a crawl, hurting the ability of companies to timely repay that debt and keep the solid credit ratings that allow them to borrow so cheaply, according to a theory laid out by UBS strategist Francois Trahan.
Many Wall Street strategists share the concern about the ballooning corporate debt load but few sound as worried as Trahan. Most put it as a footnote in their 2020 outlook reports. The issue is, as Trahan points out, is that credit issues usually don’t matter to the equity market unless the economy is in a slowing or contracting phase.
In a Tuesday note, Trahan said that U.S. corporate debt has surged by 50% since 2009 and now stands at nearly $10 trillion. Such a jump in corporate debt would be more worrisome had it not been for the steady economic recovery and steep drop in yields, he said. Since 2010, yields on Baa-rated corporate bonds have fallen to around 3.9% from more than 6.3%.