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June 30, 2022  |  3 Minute Read


Corporate balance sheet health often serves as a bellwether for downgrade and default trends. In this Credit Check-In, we discuss how our outlook for corporate fundamentals is evolving amidst the current market volatility and rising recession risks, and why we believe US and European corporate balance sheets can withstand macro headwinds.


Strong Starting Point

US and European investment grade (IG) and high yield (HY) corporate balance sheets entered this year from a position of relative strength, having benefited from the economic reopening in major economies and accommodative financial conditions which allowed debt to be issued or refinanced at low rates. Disciplined capital allocation, including higher-than-usual cash levels, has bolstered asset cushions. As a result, key credit metrics such as leverage, interest coverage, and earnings before interest, taxes, depreciation, and amortization (EBITDA) are all in much better standing compared to 2020 levels (Exhibit 1).


For now, many companies continue to benefit from healthy consumer demand given low unemployment, rising wage growth, and excess savings. That said, savings rates are falling and we are mindful that the buildup of excess savings that households are sitting on could crumble sooner than expected if inflation continues to run at multi-decade highs. We are also closely monitoring earnings trends given high input and labor costs facing the corporate sector.



Exhibit 1: US Corporate Leverage Ratios are Relatively Low


US corporate leverage ratios are relatively low

Source: Goldman Sachs Asset Management, BofA Securities. As of March 31, 2022. IG ratio excludes financial issuers.



Decoding Recession Concerns

Heading into the third quarter, inflation and monetary tightening will likely remain at the root of market volatility. Soft landings are more common when long-run inflation expectations are well-anchored and the private sector balance sheet is strong, but less common when inflation is high.1 Today’s cycle reflects all three elements, underscoring uncertainty on the economic outlook.


The challenging macro backdrop has been reflected in corporate-level news, with companies beginning to adjust to the prospect of tighter financial conditions and the risk of a US recession. Weaker-than-expected first quarter earnings and/or lower second quarter earnings guidance from several large US companies have raised concerns around the outlook for corporate balance sheets. We are paying close attention to lower quality and cyclical companies, particularly those that are highly exposed to elevated inflation. At the moment, we believe that the corporate credit market has the strength to persevere through ongoing market volatility and to provide solid risk-adjusted returns for investors.


We decode the driver of these misses relative to expectations and downbeat outlooks in Exhibit 2. The common thread in the negative market response is a concern around a deceleration in consumer spending; however, we believe the underlying credit signal is more nuanced than headlines may suggest. In our view, the earnings developments were driven by a combination of sector-specific, structural, and cyclical factors. These nuances underscore the importance of active fundamental credit research.



Exhibit 2: Decoding Recent US Corporate Earnings Headlines

Decoding Recent US Corporate Earnings Headlines

Source: Goldman Sachs Asset Management. As of June 30, 2022.



Overheard at Goldman Sachs

Each month we feature quotes from our investment team, offering a glimpse into our investment views and what we are monitoring and analyzing.


“Companies have built up liquidity cushions to withstand a more challenging macro environment. Notwithstanding idiosyncratic challenges, we do not expect to see a rerun of the 2020 downgrade and default wave.”


Stephen Waxman, Head of Global Investment Grade Research

Goldman Sachs Asset Management | June 2022

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1 Goldman Sachs Global Investment Research -US Economics Analyst: The Odds of a Soft Landing: Lessons from G10 Economies (April 17, 2022).


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