KBRA Financial Intelligence

3 Things in Credit: Dimon on Credit, Growth Catalysts, and Earnings Outlook

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Welcome, market participants, to another 3 Things in Credit. I’m Van Hesser, Chief Strategist at KBRA. Each week we bring you 3 Things impacting credit markets that we think you should know about.

Well, congrats. You’ve made it to summer, at least the unofficial start to summer. Sell in May and go away? Maybe not this year. We’re on an elephant watch. As in, the two elephants in the room: one being the impact of tariffs, which we expect to see over the course of the summer, and two, the impact of the “Big, Beautiful Bill” as it moves through the legislative process. One comment this week from the head of an asset manager stuck with me: “Markets aren’t priced for disappointment.” You’ll probably want to stay close to home this summer.

This week, our 3 Things are:

1. Dimon on credit. JPMorgan Chase’s CEO is concerned about credit.

2. Growth catalysts. They’re out there, right?

3. Earnings outlook. What do Street strategists say?

Alright, let’s dig a bit deeper.

Dimon on credit.

So, this week we got an Investor Day from the largest bank in the U.S., JPMorgan Chase. And that means we get a slew of candid color, always welcome, from CEO Jamie Dimon.

The headline coming out of his remarks this week related to credit and was a surprising (and characteristically blunt) one from Mr. Dimon: “I think credit today is a bad risk.”

Well, that’s kind of a showstopper, especially given that it comes from someone who has a trillion and a half dollars of credit on his balance sheet. He added, “I am not a buyer of credit today.” So that is clarifying. That’s trader talk for “credit today is mispriced.”

Both statements need the broader context, which Mr. Dimon provided, but many media outlets did not. Mr. Dimon believes there is more economic risk out there than what is reflected in the price of credit today.

He thinks the risk of stagflation, which he defines as a recession with inflation, is “2x” the market’s expectation. By the way, Mr. Dimon’s definition of stagflation is a more severe interpretation on the growth element than the commonly held view, which is low growth and not necessarily a recession.

“Credit,” he thinks, “will be worse than people think [in a] recession.” He does mention that he doesn’t think that the loss experience would reach the levels seen in the global financial crisis, but he does think credit losses in a recession today would be worse than what is commonly believed. He references what he sees as “15 years of pretty happy-go-lucky credit, a lot of new credit players, different covenants, different leverage ratios.” He points out that “there's leverage on top of leverage in some of these things.”

Mr. Dimon is also more concerned than most about geopolitical risk, growing fiscal deficits, and fluid relationships with foreign economic actors:

• On geopolitical risk, he observes, “There's an operating assumption … that it's not a big deal. I think the geopolitical risk is very, very, very high. How it plays out over the next several years, we don't know.”

• On deficits: We have the largest peacetime deficit we've ever had, almost 7% of GDP. If you go around the world, the other major countries are around 3.5% of GDP. Our debt to GDP is 100%. Things happen out there. We have huge deficits.”

• On foreign relationships: He is worried that foreign interests help set the U.S. 10-year rate, and trade policy among other things is creating a lot of risk out there.”

Here's our view on Mr. Dimon’s view:

• His sensitivity to risk is as candid as any big bank banker, in our opinion, and he is not shy about expressing that view. Recall his call that an economic “hurricane” was swirling just offshore in 2022.

• We agree that the market has become complacent and, as a result, is mispricing the risk in credit. We have warned that two imminent risks—our two elephants in the room: one, the impact of tariffs, which have yet to hit, but will over the next several months, and two, negotiations on the Big, Beautiful Bill, which bring investor concerns on debt and deficits back to center stage—will catalyze higher risk premia.

• We agree that geopolitical risk is being undervalued. The world is transitioning to more of a multipolar leadership model—something that introduces greater risk, all other things being equal, into the economic landscape.

Alright, on to our second Thing—Growth catalysts.

When sizing up the markets, we think of scenarios: bull, base, bear. It’s good analytical hygiene. Test your conviction, your base case, with what could go right and what could go wrong.

Our base case tilts toward stagflation with growth slowing to 1% (so, not Jamie Dimon’s stagflation recession scenario), unemployment peaking in 2025 at 4.5%, and inflation remaining manageable but stubbornly above target. So, call it “moderate stagflation.”

The bear case would be more along the lines of what Mr. Dimon has laid out: recession, unemployment rising above 5%, and inflation rising to 4% or so. The path to this outcome would be:

• Escalating trade war (complete with retaliation by large trading partners)

• Aggressive deportation/limits on immigration (which triggers wage pressure and inflation)

• Commercial pullback (which results in layoffs, reduced capital expenditure)

• Consumer pullback (where there is increased worry about job security, wage contraction, and negative wealth effect)

• Interest rate spike (with reduced foreign buyers of Treasuries, inflation pressures)

The bull case would be … what is the bull case?

This is tougher. Let’s start with the growth catalyst. Is there a growth catalyst? Stocks are trading 5 multiple points above average; there has to be a growth catalyst, right?

I guess you could say it’s AI, but is that enough to offset the policy-related headwinds broadly across the economy?

Let’s start with tariffs. Tariffs will not go away, the president reminds us that he campaigned on tariffs, in part to redirect global trade as he sees fit, and in part because he needs the revenue to pay for his tax cuts. The tariff regime may ultimately end up being a 10% universal tariff plus targeted levies stacked on particular industries and countries. But it will ultimately leave a mark on growth.

What about tax cuts and interest rate cuts? Both are stimulative, but unfortunately, both are a ways off. Tax cuts, part of the Big, Beautiful Bill, won’t begin to flow in until Q4 and after, and we don’t know exactly what the final bill will look like. Passage more likely will just prevent what would have been a sizable tax hike. Not exactly a growth catalyst.

Interest rate cuts would be, as rates are clearly restrictive. But rate cuts are unlikely until we see inflation resume its course toward target, but we don’t see that happening until you have a material downgrade of growth. We do see that coming, but not until Q4 or beyond. And then, we see just 50 bps of cuts.

The point is there really isn’t a growth catalyst of any magnitude in sight. Status quo might just be the best we get for a while.

Alright, on to our third Thing—Earnings outlooks.

Forecasting is a tough business, whether you’re a meteorologist or an equity strategist. Bloomberg is out this week with its latest gathering of Street strategist forecasts for the S&P 500’s year-end 2025 level and full-year 2025 earnings.

Of the 21 strategists surveyed, three more capitulated this month by lowering their year-end forecast; that’s on top of 13 that lowered a month ago. Five intrepid souls have the same forecast that they had in March, with only one of those holding on to a forecast below where we are today. The median year-end level stayed the same month-on-month at 5,900, implying a mere 0.8% rise from today. Nine of the strats (43%) are forecasting the S&P 500 to be lower at year-end than where it is today.

As for earnings, the median EPS forecast for full-year 2025 is $255, down fractionally from a month ago, but down 6% from the cyclical high of $271 set back in February. The median estimate represents a 3% increase over the 2024 result. The bottoms-up forecast, courtesy of FactSet, is +9%. The low forecast among strategists is $240, which would be down only 11% from that February level. And that forecast result is the only estimate among the group that would represent a year-over-year decline in earnings for the index.

What this tells us is that equity strategists are not expecting the policy shock to be all that shocking to large corporate earnings. Now, you could argue that equity strats are, by their very nature, optimistic. We wonder how these estimates might change if you surveyed 21 bond strategists. For what’s it’s worth, we have stuck with our earnings estimate, +6%, for six months—right through all of the volatility.

We find these results to be incongruous with one-year recession forecasts, which seem to center between 40% and 60%. We sit at 40%—elevated for sure, reflecting the impact of uncertainty and the vulnerability of consumer spending. But it also reflects the strong starting position of consumers, businesses, and the financial system heading into slowdown.

So, there you have it, 3 Things in Credit:

1. Dimon on credit. JPMorgan Chase’s CEO sees a riskier world than risk markets.

2. Growth catalysts. They’re hard to find.

3. Earnings outlook. Large corporate earnings should prove to be relatively resistant to a base case scenario of moderate stagflation.

As always, thanks for joining. We’ll see you next week.