Cracks in the Armor of Corporate Health

After several quarters of resilience, our latest survey of Loomis Sayles’ credit analysts yielded its weakest results since it launched in 2021. Conducted amid early April’s market volatility and tariff announcements, the survey revealed a concerning shift in our credit analysts’ expectations for key corporate indicators like costs, pricing power and margins. The findings suggest a deteriorating outlook for corporate health, which has been a key underpinning of the US economic expansion.

The pause on reciprocal tariffs and positive developments with China provide reason for optimism. However, we believe the risks highlighted by Loomis Sayles’ credit analysts remain highly relevant for investors.  

Costs expected to surge

Expectations for input and supply chain costs saw the biggest change, with the CANDIs reading surging to 86 (the highest possible reading is 100). The cost of doing business is widely expected to rise across industries, but particularly in manufacturing-related industries.

Chart source: Loomis Sayles Credit Analyst Diffusion Indices, as of 8 April 2025. For the input and supply chain costs component, readings above 50 indicate a rising trend. The chart presented above is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and, therefore, should not be the basis to purchase or sell any securities. The information is not intended to represent any actual portfolio. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

If input costs rise, a key question is whether companies will have the ability to pass those costs on to consumers, known as pricing power. If companies pass those costs on to consumers, inflation is likely to rise, and if companies absorb those costs, it would put pressure on margins. The CANDIs show that our credit analysts expect pricing power to weaken as companies absorb some added costs.

Chart source: Loomis Sayles Credit Analyst Diffusion Indices, as of 8 April 2025. For the pricing power component, readings above 50 indicate a rising trend. The chart presented above is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and, therefore, should not be the basis to purchase or sell any securities. The information is not intended to represent any actual portfolio. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

Below are a few anecdotes from our credit analysts.

Technology: At the time of the survey in early April, we believed that input costs would increase, potentially pressuring margins. Semiconductor companies typically have more pricing power and would likely be more insulated from rising costs. Hardware companies, such as the manufacturers of PCs, smartphones and servers, would be more acutely exposed. That said, most product categories in the sector have now been exempted from the tariffs and companies have seen little impact so far.

Homebuilders: Pricing power has significantly deteriorated for the homebuilders over the past few months. New home inventory is high—just 10% below peak levels reached prior to the global financial crisis. Layer on the added costs of tariffs on building product supplies, stubbornly high mortgage rates and the potential pressure on construction labor from changes in immigration policy, and we expect pressure on the margins of these companies.

Consumer staples: These companies have passed through significant cost increases over the past few years and have indicated the consumer may be reaching a point where they are unwilling to pay higher prices. Several companies have mentioned that consumers are trading down to private label (store-brand) goods, and we expect that trend to continue. If costs continue to rise, we expect these companies to absorb most of the increase and try to stay competitive through increased promotions.

Troubling expectations for margins

The decline in pricing power corresponds with a decline in expectations for margins. In our view, margins are the most important indicator of corporate health. After about six quarters of stability near the neutral level, the CANDIs’ margin reading dropped significantly in April. More troubling, the number of industries expected to come under margin pressure jumped from 5 in January to 17.

Chart source: Loomis Sayles Credit Analyst Diffusion Indices, as of 8 April 2025. For the profit margins component, readings below 50 indicate a falling trend. The chart presented above is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and, therefore, should not be the basis to purchase or sell any securities. The information is not intended to represent any actual portfolio. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

The good news is that overall company margins are starting at a pretty robust level, with US large cap margins near all-time highs. That suggests that companies have some cushion before margins go negative. This is an area we’ll be following closely.

A significant hit to the corporate health outlook

One thing to keep in mind is that the CANDIs are an indicator of the direction of travel, not the magnitude. That said, the direction is pointing to weaker corporate health across the board. Credit investors generally want to see stable or improving company outlooks, and our credit analysts anticipate worsening outlooks for 15 industries. Looking ahead six months, we expect volatile markets and a more challenging operating environment for corporates. In our view, fixed income valuations may not be reflecting the fundamental deterioration captured in our survey.

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