KBRA Financial Intelligence

3 Things in Credit: Recession Risk, C-Suite Sentiment, and Time for Credit

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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.

I came across a chart this week plotting U.S. corporate profits as a percentage of GDP. It was fairly consistent in the 50 years post-World War II at around 6%. Then, in the mid-1990s, it hockey sticked up to where we are today, around 11%. That rise was in the wake of the creation of the World Trade Organization in 1995 and China’s entry into it in 2001. Sure, lower taxes and technology-driven advancements are part of this story, but so is free trade. We may be at another inflection point as the move away from globalization takes shape. Something to think about.

This week, our 3 Things are:

1. Recession risk. For those keeping score, we’ve gathered the views of a broad cross-section of forecasters. We’ll bring you up to speed on what they’re saying.

2. C-suite sentiment surveys. There are divergent views.

3. Time for credit. Performance data demonstrates the appeal of the asset class.

Alright, let’s dig a bit deeper.

Recession risk.

Well, that changed pretty quickly. Recession risk is back on the rise, driven by fears that consumer and commercial spending is being impacted by uncertainty around trade tensions, the inflation outlook, and higher-for-longer interest rates. The Bloomberg consensus one-year Recession Probability Forecast is currently 25%, which is about average, and up a tick from its recent low of 20%. Most of the respondents making up that consensus submitted their forecasts a little over a month ago, right at the post-election peak in the stock market. Since then, the soft data has been increasingly worrisome (consumer and small business sentiment, ISM manufacturing, CFO surveys), and markets have sold off, reflecting growing caution around the upcoming hard data.

There have been many noteworthy forecasters taking up their one-year recession probability estimates. DoubleLine CEO Jeffrey Gundlach is up to 50%-60%, as is Alan Blinder, economics professor at Princeton and former vice chair of the Fed. CNBC’s survey of CFOs is at 60%. Former Treasury Secretary Larry Summers is at 50%. Morgan Stanley’s Dual Mandate Model is at 44%. J.P. Morgan chief economist Bruce Kasman is at 40%. A Deutsche Bank poll of 400 global market participants is at 43%. Muhammed El-Erian—president, Queen’s College Cambridge, and former CEO of Pimco—is at 25%-30%. The New York Fed’s yield curve model is at 27%. Sitting below the long-term average is Goldman Sachs chief economist Jan Hatzius at 20%. I’m at 25%.

So, what do we do with this information? Let’s look back at 2022, when we had a similar spike in recession probabilities. Recall, at the time, the Fed had ditched its “inflation is transitory” north star and started hiking rates. Based on the history that hiking cycles almost always end up in recession, the recession probability started to climb in Q4 2021 in anticipation of the Fed hiking, and credit spreads moved higher in lockstep. High-yield spreads jumped from 274 bps in October 2021 (when recession probability was 10%) to 583 bps in August 2022. By the way, that peak was five months before recession probability peaked at 68% in January 2023. Not surprisingly, spreads and recession probability are positively correlated. And bear in mind that the U.S. did not slip into recession despite the most aggressive hiking cycle in 40 years. Still, until we get a clearer signal that recession probability will flatten out, and the U.S. can avoid a recession, look for the risk premium in credit to build.

Alright, on to our second Thing—C-suite surveys.

Two CFO surveys came out this week, with differing degrees of concern about the current environment. The latest CFO Survey, conducted in partnership by the Richmond Fed, the Atlanta Fed, and Duke University, had 345 to 390 firms across the U.S. respond between February 18 to March 7. For context, that period covered the correction in the S&P 500—so, depending on when you responded, you might have had a very different view. In any event, the title of the survey is “Optimism [Among CFOs] Falls Amid Concerns about Tariffs, Uncertainty.” Interestingly, the Optimism Index for “total U.S.” fell from 66 to 62.1 (the average is 60), while the Optimism Index for a CFO’s “own company” also ticked lower but remains around the longer-term average. As expected, the most pressing concern cited by CFOs in the latest survey was trade/tariffs, supplanting labor quality/availability in the previous iteration. Respondents on average are expecting 6.8% revenue growth in 2025, down just a touch from 7% forecast back in Q4.

Interestingly, only 14% are forecasting a recession over the next four quarters. That’s up from the Q4 result, where just 9% of CFOs were forecasting recession. Think about that contrast with our first Thing, and what that says about a C-suite member as opposed to an academic or investor.

A very different view came out of the CNBC CFO Council Survey, where its headline reads, “Recession is coming before end of 2025, generally pessimistic corporate CFOs say.” CNBC’s results were derived from just 20 respondents surveyed between March 10 and 21. The S&P 500 bottomed on March 13, so this survey period was at peak pessimism. Some 75% of those surveyed responded that they are “somewhat pessimistic” about the overall state of the U.S. economy. Moreover, 60% of this admittedly small group expect a recession in the second half of 2025, and another 15% expect one in 2026. In Q4, amid post-election euphoria, just 7% of respondents forecast a recession in 2025. Some 90% of respondents say tariffs will cause resurgent inflation, and 95% believe policy uncertainty is impacting their business decision-making. What a difference a month makes.

Over at the Conference Board, its Measure of CEO Confidence, done in collaboration with The Business Council, was conducted between January 27 and February 10 (that’s peak post-election euphoria). Its report is titled “From cautious optimism to confident optimism,” reflecting results that hit its highest level in three years.

At The Business Roundtable, its CEO Economic Outlook drew 150 respondents from February 19 through March 7, 2025. While its index dipped “modestly” to a tick above it long-term average, it did forecast GDP growth of a robust 2.5% for 2025. The survey was quick to point out that “more than three-quarters of responses were submitted before the 25% U.S. tariffs on Canada and Mexico were announced on March 3, 2025.” What a difference a month makes.

Alright, on to our third Thing—Time for credit.

We’ve talked about this for some time now—that, for the first time in probably 15 years, the time is right for fixed income. Following the painful correction in rates in 2022, yields in fixed income in general, and credit in particular, have once again become attractive. Attractive in that they can once again assume their role of providing meaningful income and diversification to portfolios that had become loaded with equities.

And now, the asset class performance data has become quite interesting. Year-to-date, the S&P 500 total return is -2.6%, reflecting its correction catalyzed by the “shock” of policy uncertainty. The said shock of policy uncertainty so far has been sufficient to reduce some of the froth in the equity market, but not enough to materially alter risk/reward in credit.

So far this year, the Bloomberg IG index has produced a total return of +1.7% (that’s outperforming the S&P 500 by 4.3%), while the Bloomberg high-yield index has returned +1.5%. A 60/40 portfolio—made up of 60% Bloomberg large cap equities and 40% of the Bloomberg US Agg Index—has, not surprisingly, outperformed the S&P by 1.8%, although its total return of -0.8% is being weighted down by the equities’ component.

We probably know enough by now to conclude that 2025 is likely to be a volatile year in markets, as investors, both in the U.S. and abroad, try and dimension the effects of the new administration’s policy “transition.” We also believe we know enough to say that stocks and bonds are likely to be negatively correlated, which is a way of saying that the downside to risk is contained, i.e., not positively correlated where everything sells off. The starting point for this economy is too solid. But, as we have said recently, we are normalizing (slowing down) and the global economic and geopolitical order is being remodeled. Sounds like a good time to be in credit.

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

1. Recession risk. Market participants are clearly moving probabilities higher. A lot would have to go wrong here quickly. We’re comfortable at 25%.

2. C-suite sentiment surveys. Sentiment is clearly reflecting a growing conservatism.

3. Time for credit. Demand for income and diversification, and solid if unspectacular returns is on the increase.

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