KBRA Financial Intelligence

3 Things in Credit: Growth Catalysts, Homebuilder Bounce, and Tariff Bump

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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.

This week, I stumbled upon a conference hosted by the Fed with the less-than-captivating title, “Integrated Review of the Capital Framework for Large Banks Conference.” I blame my own attraction to this event to my being a recovering bank analyst. But that’s besides the point.

Embedded in the day-long program was a fireside chat between two folks who, in my wildest dreams, I could never imagine their paths crossing. Michelle Bowman, the Fed’s Vice Chair for Supervision who is a Trump-appointed lawyer and career Republican bureaucrat from Kansas (and noteworthy dissenter on the FOMC)—and Sam Altman. Yes, that Sam Altman—the AI savant.

The discussion was riveting. Not so much due to Ms. Bowman’s questioning—rather, just listening to Altman’s characteristically detached view of the AI landscape and impact. Among his tidbits: “No one knows what happens next with AI. It’s too complex and too new and impactful.” And he lists three “scary” things AI could usher in. Find it, listen to it, and let me know if you were able to sleep that night.

This week, our 3 Things are:

1. Growth catalysts. Something must be driving stocks higher.

2. Homebuilder bounce. Is housing finally turning?

3. Tariff bump. Is 15% the new 10%?

Alright, let’s dig a bit deeper.

Growth catalysts.

The Wall Street Journal asked this week, “Why are stocks up?” Answering its own rhetorical question, the headline continues: “Nobody Knows.” A subheading adds: “A torrent of bad news hasn’t been enough to sink the market.”

Believing that investors are acting on something other than FOMO, we’ve come up with a handful of growth catalysts.

First up is less uncertainty. While the policy outcome might be worse than expected—tariffs higher than expected, the deficit threat in One Big Beautiful Bill (OB3) larger than expected—but we know more about both today than we did in April. More certainty than uncertainty. We also know now that the administration is using tariffs as a negotiating tool, making policy more transactional than ideological. Again, more certainty than uncertainty.

Related, we know the OB3 brings with it not insignificant stimulus in the form of tax cuts and business investment tax incentives. That should goose growth to some degree over the near term. Once again, more certainty than uncertainty.

Deregulation is another growth catalyst, especially in financial services and energy. Efforts in this area have taken a backseat to tariffs and OB3 in the first six months of this administration, but investors can rightfully factor in growth-positive developments on this front going forward.

And let’s not forget about AI. Curiosity around this potential Fourth Industrial Revolution shows no sign of diminishing. In fact, just the opposite. Regardless of what is happening with the rest of business, firms have made investing in AI a strategic imperative. While estimates of value creation of AI are all over the board, from trivial to transformational, that’s enough to get businesses to continue to invest.

And finally, there is the prospect of rate cuts. This one is more ambiguous in terms what it signals. In and of itself, rate cuts are a growth catalyst. But the pertinent question is, why is the Fed cutting rates? To remove excess restriction? Yes, that can explain why you would want to buy stocks, even at historically high valuations. Alternatively, if the Fed is cutting because it sees growth slowing materially, well, that’s a different story.

Underneath it all is earnings, which are set to slow in the second half to low- to mid-single digit growth, offsetting to some degree the effects of these growth catalysts. That means there must be headwinds as well. In that column, we would include still some uncertainty, particularly around trade policy, less robust consumer spending capacity, and sticky inflation. Imperfections in markets priced nearly for perfection. Sum it all up and you get a tougher case to make for stock gains, but all of this is good enough for credit, especially higher quality credit.

Alright, on to our second Thing—Homebuilder bounce.

So, we got better-than-expected results out of two bellwether homebuilders, D.R. Horton and PulteGroup. Horton’s fiscal Q3 EPS and revenue beat the estimates by 16% and 5%, respectively, while Pulte beat bottom line by 1% while hitting the top line. Horton stock jumped 17%, Pulte 12%. Does this represent a turn in the otherwise dismal housing market?

Unfortunately, not really. Year-over-year, net income at Horton was down 24% on 7% lower revenues. Adjusted net income at Pulte fell 15% on 4% lower topline. The stock moves in both cases seem to fall into the relief rally camp, clawing back some of their respective recent downdrafts. Both companies are proving to be adept at navigating the challenging environment, and credit default swaps for both have returned from their April spikes higher back into favorable territory.

So, what did we learn about the broader housing industry in these releases?

Horton acknowledged the two elephants in the room weighing on performance: affordability constraints and cautious consumer sentiment. Management observed, “It's been choppy. And that choppiness can be based on rate or the noise that you see in the news cycle these days.” Management did reiterate a positive outlook for the housing market over the medium to long term.

Concerns over labor availability were downplayed. Management characterized supply as plentiful. “We have the labor that we need. Our trades are looking for work and that's why you've seen sequential and year-over-year reduction in our cycle time, because we have the support we need to get our homes built.”

At Pulte, management also acknowledged that the operating environment has grown more challenging. Feedback from would-be homebuyers indicates a variety of concerns, ranging from affordability and the inability to sell an existing home to a slowing economy and the fear of potentially losing their job. Consumer confidence was described as “uncertain” at best.

Sensitivity to interest rates was pointed out, with the company noting that the rate dropped in the last two weeks of June did stimulate traffic into Pulte communities, leading to a corresponding increase in sign-up activity. Management summed up the environment this way: “Our view is that people desire home ownership and remain actively engaged in the process. They just need the value equation to work and to have confidence in their financial circumstances to feel more comfortable signing the contracts.”

The results come on the back of more downbeat housing news this week, with existing home sales in June of 3.93 million missing its estimate of 4.03 million. The current level has fallen to levels last seen in the GFC. New home sales in June of 627,000 came in short of its 650,000 estimate. With home affordability remaining stretched, mortgage rates high, and consumers expressing concern over the near-term prospects for the economy, homebuilder sentiment remains downbeat in a business that typically accounts for 3%-5% of GDP. Add that to the list of headwinds.

Alright, on to our third Thing—Tariff bump.

Emboldened by the facts that markets have recovered from the April shock and inflation has been relatively well behaved, the administration has gone back to the tariff well and is, for now, signaling that its universal tariff is being taken up from 10% to 15% for countries that go along, and 50% for those that don’t. The 15% figure turned up in the Japan agreement and is the level that press reports are pointing to in the European Union negotiation. The president spoke to these new guidelines this week. Additional levies of course will turn up on certain sectors (autos, metals, pharmaceuticals, etc.) and countries which will take the effective tariff rate theoretically above 15%.

Needless to say, the 15% level represents a significant headwind to growth and a threat to inflation over the near term. Higher prices figure to negatively impact consumer spending and commercial capex. We expect GDP growth in the U.S. to come in at 1.2% for 2025, and only marginally higher in 2026. Still, we still see the probability of the U.S. tipping into recession over the next 12 months at 30% due to the strong starting point of U.S. consumers and businesses in the aggregate coming into the slowdown. One consequence of continuing to roll out and adjust tariff levels is that the inflation impact could persist beyond a one-time price adjustment. And that, of course, could limit the Fed’s willingness to cut interest rates as we move forward.

We continue to remind market participants that the full effect of tariffs is yet to be defined. That’s due in part to the fact that 50% of imported goods are intermediate goods (basic materials) that get manufactured into final products. We also believe companies have been able to reduce the impact somewhat thus far due to various strategic actions, such as frontloading purchases ahead of tariffs. We expect the impact of tariffs to be clearer in Q3 earnings, although guidance from the airlines, auto makers, and other industrials in Q2 earnings calls indicate that the effects are already being felt.

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

1. Growth catalysts. They are there, but how much higher can valuations be pushed?

2. Homebuilder bounce. This most sensitive to interest rates sector continues to suffer, although top firms are managing well through the challenges.

3. Tariff bump. 15% is the new 10%. These are not levels to shrug off.

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