U.S. Equity Optimism From A Virtuous Cycle Of Credit Worthiness

We fell down a very slippery slope in 2008. As earnings fell, corporate asset values collapsed. With this, the potential recovery of principal by the creditors plummeted. That meant higher rates of interest, lower earnings, and lower chances of refinancing. All that increased the likelihood of default. It was vicious.

Today we see the opposite. Examining the 400+ nonfinancial firms of the S&P500, we’re seeing fundamentally stronger firms, quarter by quarter. Our calculations show far higher recovery rates, improved debt servicing structures, and higher interest coverage ratios, even when all of the calculations are done very conservatively.

That means better financing and refinancing terms from lenders, which further improves the balance sheet’s overall strength. It also means cheaper costs of debt, and therefore better earnings and, more importantly at this stage of the market cycle, lower risks of default.

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