KBRA Financial Intelligence

3 Things in Credit: Savings Rate, 2025 Earnings, and Beige Book

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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.

It’s September, which is no long-term investor’s favorite month, and for good reason. It is the only month of the year where the average stock market performance is negative. And in credit, average returns have been negative for the past 10- 20- and 30-year Septembers. Against that backdrop, the rather rude selloff on September 3 is holding true to form.

As an aside, we were amazed to hear a panel of the chattering class on Bloomberg TV flummoxed as to why the selloff took place. “There are so many possibilities,” went the lament. Here’s a clue. Markets are priced for perfection. If you’ve got things you’re worried about, that doesn’t square up with perfection. It’s not that hard.

In any event, this week, our 3 Things are:

1. Savings rate. It’s either a sign of exuberance or something else.

2. 2025 earnings. Do the forecasts square up with the macro view?

3. Beige Book blues. Slowing is now consensus.

Alright, let’s dig a bit deeper.

Savings rate.

The Bureau of Economic Analysis (BEA) reports that personal savings as a percentage of disposable income has fallen to 2.9%, the lowest level since April 2008. The long-term average is 7%. In 2008, savings were put into either down payments on or furnishings for new homes (except, of course, where “no money down” purchases were the norm). Today, consumers (at least some of them) continue to live a lifestyle they grew into during the pandemic, one fueled by stimulus and wage gains. Now, wage growth is slowing and excess savings are gone. And it looks like a lot of regular savings are getting drained as well.

Yet real personal spending came in at a reasonably robust 0.4% month-on-month increase in July, beating the estimate of 0.3%. Moreover, June and May’s results were also revised higher, to 0.3% and 0.5%, respectively. Not that the FOMC needs it, but it would be hard to justify cutting 50 basis points (bps) at its September meeting with spending numbers like these.

Meanwhile, real disposable personal income has slid down to negligible growth of 0.1% in the past two months. We’ve long talked about how some percentage of consumers are delusional in terms of their ability to live within their means. This was no doubt made worse during the pandemic era because of all of that stimulus that fueled an unsustainable lifestyle. Now, of course, we see consumer debt reaching all-time highs, along with delinquency and charge-off levels that are inconsistent with historically low unemployment rates. The pieces, somewhat unsettlingly, fit nicely into our “Two Economies” theme.

The unsettling part is just how sustainable is this? Wealthier households, boosted by strong housing and stock markets and secure job prospects, will continue to spend. For less wealthy households, their ability to spend at recent levels is clearly at risk. Add to this a weakening job market and you have the makings of a drag on overall economic growth that is likely to become more evident as we head into and through 2025.

Alright, on to our second Thing—2025 Earnings.

It’s never too soon to look forward and try and figure out where we’re headed. A Bloomberg survey of Street strategists shows that 12 have 2025 estimates for the S&P 500. The median estimate is $265 a share, that’s 10% higher than where 2024 is expected to be. All 12 forecast an increase over 2024. A bottoms-up consensus view compiled by Bloomberg calls for an even more robust 14.5% growth. FactSet, not to be outdone, forecasts a 15.3% rise. A belief that operating leverage will be positive is at work here as revenue growth is more muted, but still healthy—6% at FactSet and 5.9% at Bloomberg.

According to FactSet data, all 11 S&P sectors are forecast to grow earnings in 2025; eight at double-digit rates (including materials, energy, industrials, and consumer discretionary—all cyclicals), suggesting a rather robust backdrop here and abroad.

These estimates strike us as too optimistic. Evidence of economic slowdown is at hand, based on the continued unwind of stimulus effects and the bite of monetary tightening here at home and prospects for sluggish at best growth overseas. We see all of that flowing into the Bloomberg consensus for expected economic growth in the U.S. in 2025, which is currently pegged at 1.7%, down from an expected 2.5% in 2024. So, how often do we see earnings grow 15% when the economy is slowing materially? How often do margins hold up when we are slowing? How often do we see earnings grow into a weakening jobs market?

And we don’t suppose that these estimates factor in the effects of the U.S. presidential election, where Goldman Sachs (GS) estimates the proposed corporate tax hike by the [Kamala] Harris campaign could cut S&P 500 earnings by 8%. Under [Donald] Trump’s tax cut plan, GS estimates earnings could grow by 4%. It is important to point out that neither estimate takes into account the impact of other policy initiatives or rhetoric by either campaign. And in the increasingly likely outcome of gridlock (where no party controls the White House and both houses of Congress), campaign talking points rarely end up in legislation. For what it’s worth, Goldman estimates that a Trump presidency would shave 0.5% off real GDP in 2025, while a Harris win would result in a neutral to very slight boost to GDP.

In any event, it is hard for us to see where earnings growth of 15% comes out of this environment.

Speaking of which, let’s move on to our third Thing—Beige Book blues.

One of the things that we think about as the cycle turns is that policy actions have tails. As much as policymakers would like to act with, and see, precision, it just doesn’t work that way. It’s no wonder that Fed Chair [Jerome] Powell said the thing that keeps him up at night more than any other is trying to thread the needle where inflation is fully tamed while growth is preserved. History tells us it’s possible but highly unusual.

The data and surveys tell us growth is slowing. Housing and manufacturing are slowing. The headwinds [that] levered businesses and households face in maintaining levels of spending and investing tell us growth is slowing. Retailer earnings, commodity prices, and jobs data tell us growth is slowing. And now, the Fed’s Beige Book tells us growth is slowing.

We’ve always been a bit skeptical of the Beige Book. There is not a lot of hard data. Rather, it is a qualitative review—a survey of economic conditions gathered eight times a year from each of the Fed’s 12 regions. So it is, by definition, highly subjective. But it is, to quote the Fed, “one of the most valuable tools at the committee’s disposal for making key decisions about the economy.” OK then.

The latest iteration of the Beige Book out this week tells us that economic activity was flat to declining in nine districts, up from five in the previous period (July 2024). Consumer spending fell in most districts, as did manufacturing activity. Employment levels were “steady.” A “glass is half empty” view would characterize that as not growing.

The good news here is that nine districts expect activity to remain stable or improve somewhat in the coming months, while only three anticipated slight declines. That tells us that (1) activity overall is not hitting a wall, and (2) there is an expectation that lower inflation and lower interest rates are welcome developments. It points to monetary tightening having done what it is supposed to have done, namely, dampening demand while loosening up the labor market to keep the wage/price spiral at bay. If we hit the Bloomberg consensus forecast for 2025 of 1.7% GDP growth and sub-4.5% unemployment, while bringing inflation sustainably down to target, the Fed will have accomplished the improbable. Experience tells us, however, to prepare for a bumpy ride.

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

1. Savings rate. Watch out for falling consumer spending.

2. 2025 earnings. The consensus view doesn’t square up with slowdown.

3. Beige Book blues. Flat to declining activity is becoming more widespread.

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