Debt Hangover Looms After US Borrowing Binge

24 July 2018

1 min read

US Stocks with High Debt Look Vulnerable to Rising Rates

Through June 30, 2018
Past performance does not guarantee future results.
*Based on an equal-weighted universe of stocks in the AllianceBernstein US large-cap universe
†Based on net debt/equity. Excluding financial stocks
Source: Center for Research in Security Prices, IDC, Morningstar Direct, S&P, S&P Compustat, Thomson Reuters I/B/E/S and AllianceBernstein (AB)

Scott Krauthamer, CFA, CAIA| Global Head—Product Management & Strategy

Walt Czaicki, CFA | Senior Investment Strategist—Equities

US companies, lured by historically low interest rates, have taken on massive amounts of debt in recent years. As rates begin to rise, investors should beware of companies that might be vulnerable to increasing financing costs.

Over the last decade, US companies went on a borrowing binge. The debt/capital ratio of S&P 500 companies reached nearly 43% at the end of June (Display, left). Highly levered companies look vulnerable. Our research shows that shares of companies with the highest leverage sharply underperformed companies with the lowest debt burdens by 11.7% this year, while also lagging behind most other types of equity factors (Display, right).

It’s time for investors to pay closer attention to debt, as the direction of rates is changing. Rising interest rates and financing costs threaten to erode profitability. And if inflation heats up, we expect the US Federal Reserve to raise rates faster than expected—which would make it even harder for companies to finance their debts.

There is a silver lining to this scenario. The easy-money era fueled broad gains in equity markets, which made it difficult for active managers to outperform the market. Now, as central banks gradually start to tighten, active managers who demonstrate real skill are likely to perform better. Focusing on debt will become more important, as companies with strong balance sheets are likely to have an edge over competitors saddled with heavier financial liabilities.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

About the Authors

Scott Krauthamer, CFA, CAIA

Scott Krauthamer is a Senior Vice President and Global Head of Product Management & Strategy, overseeing AB's global investment products across the firm's equity, fixed income and multi-asset strategies. Prior to joining the firm, he held a variety of investment and product-management roles at Legg Mason, U.S. Trust, Bank of America and J.P. Morgan Private Bank. Krauthamer started his career as an analyst at J.P. Morgan in 1998, and his financial-services experience spans investment-management, quantitative analysis, marketing and business development. He holds a BS in finance and management information systems from the State University of New York, Albany, and is a CFA charterholder and a CAIA designee. Location: Nashville

Walt Czaicki, CFA

Walt Czaicki serves as a Senior Vice President and Senior Investment Strategist for Equities at AB. He rejoined the firm in 2015 and has been in the investment-management industry since 1986. Czaicki's roles have ranged from a fundamental equity research analyst and portfolio manager to chief investment officer. Prior to rejoining AB, he worked on the buy side for a Regions Financial predecessor organization, as well as at Commerce Trust Company and Bank of America. Czaicki holds a BSBA in finance and an MBA, both from Saint Louis University. He is a CFA charterholder. Location: Dallas

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