Investment Review and Outlook

Positive 2024 trends do not overshadow potential risks entering 2025.

Per median projections in the Federal Reserve’s (Fed’s) December Summary of Economic Projections (SEP), officials expect two quarter-percentage-point rate reductions by the end of 2025. The December projection is a half a percentage point less in policy easing next year than officials anticipated as of September.⁴

Better-than-expected consumer spending and job gains—although payrolls slowed as the year closed—as well as uncertainty regarding the inflation implications of potential regulatory and policy changes that may accompany the change in presidential and congressional leadership in the new year gave the Fed cause to consider slowing the pace of rate cuts. The U.S./China rivalry, tariff threats, and conflicts in Israel and Ukraine have increased geopolitical risks. The possibility of increased mergers and acquisition (M&A) values, which were 13 percent higher in 2024 year-over-year (Y/Y) and debt-funded M&A also are risks in 2025.⁵

Counterbalancing concerns are potentially favorable influences including deregulation that could reduce near-term compliance costs, especially benefiting Financials and Energy issuers, and stabilizing leverage at the higher end of the range and low on a net basis due to high cash levels among many issuers. Earning for companies in the S&P 500 Index⁶ (S&P 500) are projected by FactSet analysts to grow by 12 percent in 4Q24 Y/Y and 15 percent in 2025. Analysts believe earnings growth for companies outside the “Magnificent 7⁷” will improve significantly in 2025.⁸

While analysts at FactSet expect the “Magnificent 7” companies to report earnings growth of 21 percent in 2025, they expect the other 493 companies to report earnings growth of 13 percent for 2025, which is an improvement to analyst expectations of just over 4 percent earnings growth for these same companies for 2024.

U.S. IG corporate credit rating upgrades by rating agencies exceeded downgrades by about 3:1 in 2024. S&P Global Ratings noted that, “However, the future may not be so bright, as there was an even balance between positive and negative outlooks and CreditWatch revisions.”⁹

We feel that favorable operating and rating trends are offset by rising event risk and full valuations. Compressed valuations, strong investor demand, and stable fundamentals have driven a modest Overweight to the sector, with a defensive stance.

Valuations 

Corporate spreads were 9bps and 19bps tighter in 4Q24 and FY24, respectively, closing at an OAS of 80bps, per Bloomberg. 

Spreads are historically tight and comparable to the mid-2000s levels. At an OAS of +80bps, IG corporate spreads are in the 1st percentile of the 20-year range. 

Compressed valuations argue for a defensive stance entering 2025, in our view. Above average yields may continue to attract flows and support spreads.

Technicals

Based on BBG data,¹⁰ IG supply was $1.65 trillion. 

Taxable bond fund inflows, per the ICI were $440 billion in 2024. Net supply of $675 billion exceeded inflows but non-U.S. investors and insurance inflows were also elevated sustaining demand for IG credit.

Entering 2025, we expect demand indicators to remain healthy while net supply should likely be manageable.¹¹

Fundamentals

Credit quality improved in 2024 on margin expansion and stabilizing leverage. Leverage has stabilized at the higher end of the range and is low on a net basis due to high cash.¹² Financials and Energy sectors may emerge as beneficiaries of deregulation on lower compliance/legal costs. Tariffs and immigration policy could squeeze margins in Consumer/Retail sectors. Mergers and acquisition values were 13 percent higher in 2024.¹³ We expect stable credit fundamentals but more debt-funded M&A as a risk in 2025.

Sustainable Spotlight

As the materiality of environmental, social, and governance (ESG) factors in investment and credit quality analysis has been debated in recent years, perception appears to grow that issuers are marginally less focused on ESG risks and opportunities as policies and regulations shift.

Breckinridge continues to view ESG risks—particularly climate change—as material, systemic investment risks that can impact financial markets and company performance. Breckinridge integrates bottom-up climate transition risk analysis and aims to accommodate client requests for investment approaches that integrate ESG research and analysis.

As part of our ESG research, we engage in direct discussions with issuers to increase our understanding of their approach to addressing a range of ESG risks. 

For example, during the year, our analysts engaged with issuers in the Food and Beverage industry to discuss opportunities to address risk exposures and maximize associated growth opportunities within the areas of packaging, supply chain, and nutrition. 

With issuers in the Real Estate Investment Trusts sector, our direct engagements with issuers included discussions of a range of risks including embodied carbon, a major contributor to climate change, which is the climate pollution that occurs during the production and construction of materials. 

Also, during the fourth quarter, our analysts met directly with Technology companies to monitor their management of material ESG issues, including data privacy. As the prevalence of artificial intelligence in business and personal lives increases, accompanying and cybersecurity-related issues continue to grow as drivers of business risk as companies shift toward complex, data-driven products and services.

[1] The Bloomberg U.S. Corporate IG Bond Index, Breckinridge, 12/31/24.

[2] The Bloomberg U.S. Corporate IG Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. You cannot invest directly in an index.

[3] Bloomberg Intelligence. Note: IG issuer trimmed mean (Bottom/Top 10%) financial data as of 9/30/24.

[4] “Fed cuts rates 25 bp, scales back 2025 easing projections,” Reuters, December 18, 2025.

[5] Bloomberg Terminal, M&A Data, 12/31/24.

[6] The S&P 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks. You cannot invest directly in an index.

[7] The “Magnificent Seven” stocks are Google parent Alphabet, Inc., Amazon.com Inc., Apple Inc., Microsoft Corp., Nvidia Corp., Meta Platforms, Inc., (Facebook), and Tesla, Inc. During 2024, this group of stocks averaged a 65 percent gain for the year.

[8] “S&P 500 CY 2025 Earnings Preview: Analysts Expect Earnings Growth of 15%,”by John Butters, FactSet, December 20, 2024.

[9] “Investment-Grade Credit Check Q4 2024, Downgrade Lull,” S&P Global Ratings, October 25, 2024.

[10] Barclays U.S. Investment Grade Corporate Update, September 2024.

[11] Barclays U.S. Investment Grade Corporate Update, September 2024.

[12] Bloomberg Intelligence. Note: IG issuer trimmed mean (Bottom/Top 10%) financial data as of 9/30/24.

[13] Bloomberg Terminal, M&A Data, 12/31/24.

BCAI-01052025-8wydzn80 (1/8/25)

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