NEW YORK: March 3, 2025: U.S. stocks now make up 65% of the global equity market – their highest weighting in history[1]. The second-largest contributor (by market capitalization) is Japan, at a far-distant 5%. Not surprisingly, U.S. equities play an outsize role in capital flows, making the state of the American economy a focus of global attention. So how is the U.S. economy doing?
At the end of January, U.S. margin loans stood at a record level. The S&P 500 reported strong results relative to expectations, with 76% of companies reporting earnings above estimates. The Fed placed interest rate cuts on hold, pending additional data on inflation.
The Atlanta Fed’s unofficial but closely watched GDPNow forecast lowered its estimate U.S. economic growth, projecting a 1.5% contraction for the first quarter. Recent announcements about China’s DeepSeek technology challenge the premise that billions of dollars of capital need to be invested to obtain useful results with AI. The current administration’s emphasis on scaling back government spending creates additional questions about its impact on sectors dependent upon federal dollars. Geopolitical tensions add additional uncertainty.
These factors set up a tug of war between growth and safety as the markets seek guidance and data to better forecast corporate earnings and discern which sectors and companies can outperform in both the short and the long term.
Our favorite risk metric is the change in the 3-year default probability by sector. As shown in Figure 1, the change by sector has been uneven. Healthcare stands out as deserving additional analysis. This is more clearly evident in Table 1, which displays the same information in a different format.
Figure 1: Change in 3-Year Default Probability by Sector – December 31, 2024 – February 27, 2025
Source: SAS Institute KRIS data service
Table 1: Change in 3-Year Default Probability by Sector
Source: SAS Institute KRIS data service
U.S. healthcare spending as of 2023 shows that private health insurance represented 31% of total consumption expenditures, while the government share (Medicare and Medicaid) was 42%. While demographics imply increasing demand for medical and pharmaceutical services, an increased focus on cutting government expenditures implies pressure on the healthcare business model. Valuation for the sector faces the same issues as others when it comes to the impact of interest rates, and it has historically been immune from economic sensitivity. Nevertheless, the sector now faces the biggest challenge to its business model since the Affordable Care Act was passed. Additional sectors worthy of examination in this environment include the health insurance and pharmaceutical.
Sectors under structural challenge normally show stress in the relative change of the 3-year default probability. This term captures a balance of market, financial, and macroeconomic inputs. Shorter-term default probabilities are more heavily influenced by financial and market factors, and longer-term probabilities are more influenced by macroeconomic factors. The three-year curve is a sweet spot for measuring risk and opportunity for lenders and long-term investors.
Another consideration worthy of study is taking a sector that is under pressure and shorting the riskiest members and going long on the those with the lowest default risk. This is but one example of how sector and company default data can be used to develop successful trading strategies.
Contemporaneous Credit Conditions
The Kamakura Troubled Company Index® closed the month at 8.47%, down 0.11% from the prior month. The index measures the percentage of 42,500 public firms worldwide with an annualized one-month default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.
At the end of February, the percentage of companies with a default probability between 1% and 5% was 6.12%. The percentage with a default probability between 5% and 10% was 1.27%. Those with a default probability between 10% and 20% amounted to 0.82% of the total; and those with a default probability of over 20% amounted to 0.26%. For the month, short-term default probabilities ranged from a low of 8.11% on February 19 to a high of 8.67% on February 3.
Figure 2: Troubled Company Index®, February 28, 2025
At the end of February, the riskiest 1% of rated public firms within the coverage universe as measured by 1-month default probability included eight companies in the U.S. and one each in Canada, France, Luxembourg and the UK. WW International (NASDAQ:WW) beat the revenue forecast in their earnings announcement but remains under pressure long term.
Table 2: Riskiest Rated Companies Based on 1-month KDP, February 28, 2025
The Kamakura Expected Cumulative Default Rate, the only daily index of credit quality of rated firms worldwide, shows the one-year rate of 0.50% up 0.03% from the prior month, with the 10-year rate up 0.03% at 8.58%.
Figure 3: Expected Cumulative Default Rates, February 28, 2025
About the Troubled Company Index
The Kamakura Troubled Company Index® measures the percentage of 42,500 public firms in 76 countries that have an annualized one-month default risk of over one percent. The average index value since January 1990 is 14.03%. Since July 2022, the index has used the annualized one-month default probability produced by the KRIS version 7.0 Jarrow-Chava reduced form default probability model, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors.
The KRIS version 7.0 models were developed using a data base of more than 4 million observations and more than 4,000 corporate failures. A complete technical guide, including full model test results and key parameters, is provided to subscribers. Available models include the non-public-firm default model, the U.S. bank model, and the sovereign model.
The version 7.0 model was estimated over the period from 1990, through the Great Recession and ending in February 2022. The 76 countries currently covered by the index are Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Kuwait, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Nigeria, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Taiwan, Thailand, Turkey, the United Arab Emirates, Uganda, the UK, the U.S., Vietnam and Zimbabwe.
About SAS
SAS is the leader in analytics. Through innovative software and services, SAS empowers and inspires customers around the world to transform data into intelligence. SAS gives you THE POWER TO KNOW®.
Editorial contacts:
- Martin Zorn – Martin.Zorn@sas.com
- Stas Melnikov – Stas.Melnikov@sas.com
[1] Based on the MSCI ACWI equity universe