The credit rating outlook for North American companies is being downgraded by Fitch Ratings amid declining growth expectations and heightened uncertainty.
The rating agency said, in a new report, it doesn’t expect a slide into recession but its outlook for U.S. GDP growth, inflation and consumer spending have all degraded. As a result, its outlook for North American non-financial corporates has moved to “deteriorating” from “neutral,” it said.
Alongside the downgrade for North America’s overall corporate rating, Fitch recently revised its outlooks for many sectors to “deteriorating” from “neutral.” Those sectors included U.S. retail, alcoholic beverages and restaurants, plus global autos and energy.
“Uncertainty about trade policy is a major issue for companies in these sectors,” the agency said. “Although specifics are not yet available, our baseline expectation is that a higher effective tariff rate will initially stoke inflation, but consumers’ ability to absorb price increases over the intermediate-to-longer term is questionable.”
Another factor weighing on corporate credit is the risk tied to resurgent inflation slowing down rate cuts from the U.S. Federal Reserve Board, Fitch said.
“The financial flexibility of issuers at the lower end of the rating spectrum is more sensitive to a higher cost of capital, compounding the effects of a slower growth environment for issuers operating in cyclical, consumer-oriented sectors,” the agency said. It has increased its default rate forecasts for U.S. issuers’ leveraged loans and high-yield bonds.
Amid this doom and gloom, Fitch added that its rating outlook remains “neutral” for sectors that are somewhat sheltered from the effects of regulatory uncertainty and slowing growth.
“[That] include[s] sectors with less exposure to consumer cyclical demand, such as software technology and business services,” the agency said. “Other sectors are benefitting from unique demand drivers,” it noted, such as the effects of AI-driven spending on REITs, utilities and technology hardware, plus the impact of higher government defense spending on the aerospace and defense sectors.