T. Rowe and PGIM See Credit Outperforming Even If a Downturn Comes

US companies’ earnings are strong enough that money managers like T. Rowe Price Group Inc. and PGIM Inc. expect corporate bonds to outperform Treasuries over the next 12 months, even if the economy suffers.

More than half of the corporations in the S&P 500 index have posted results so far, and are performing better than analysts had feared. Even though earnings per share have fallen about 4.5% on average from last year, 80% of companies are topping earnings estimates compared with a long-term average of 65%, according to Bloomberg Intelligence.

Firms came into 2023 on strong footing, with sales per share for S&P 500 companies at an all-time high. Cash holdings were at levels that would have been a record pre-pandemic, even if they’d come off their peaks, according to data compiled by Bloomberg.

“The strength of current US earnings highlights the supportive fundamentals underlying corporate credits,” said Mike Della Vedova, a global high-yield portfolio manager at T. Rowe. “We would expect good decent positive returns and excess returns over government curves.”

Excess returns for US corporate bonds, a measure that looks at gains compared with Treasuries, are rebounding from their under-performance in 2022, when fixed income broadly sold off. Investors have been buying corporate debt recently, betting the Federal Reserve is nearing the end of its rating-hike cycle and that companies are in good shape to cope with near term risks like a recession.

Credit Risk Recedes | Spreads on high-grade US and euro corporate debt eased from highs