2025 will be the year of fiscal policy. This week, we also highlight a soaring sentiment indicator that could signal an inflection in U.S. earnings, how renewables helped bring European power prices back to Earth and how strong U.S. credit conditions could mean that net credit issuance finally rebounds.
2025 will be the year of fiscal policy.
Policymakers will face key issues including the debt limit, government funding and the expiration of individual tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA). On taxes, our economists expect most individual credits to be extended no matter the election result. The Congressional Budget Office (CBO) estimates that extending those provisions would cost $3.3 trillion (~1% of GDP (gross domestic product)) on average from FY25-FY34. The total deficit is likely to remain near 6.4% of GDP, an uncomfortably high level with debt-to-GDP already near 100%. Neither candidate seems too concerned, as both agendas would likely worsen the debt trajectory. Based on each candidate’s tax and spending platform, our economists think deficits would be modestly higher in a Republican sweep but changes to trade, immigration and regulatory policy could yield different results. In any case, the Fed could tighten monetary policy if easy fiscal policy becomes the norm.
Nearly 80% of S&P 500 earnings have been reported so far and earnings have beaten by 2% vs. consensus, resulting in 6% year-over-year Y/Y growth.
68% of companies beat on EPS (earnings per share), above the historical average of 59%. Mentions of weak demand jumped in the latest week to the highest level since 2Q20, suggesting demand remains sluggish. Consistent with this, real sales growth is flat Y/Y when excluding the Magnificent 7 and Tech. Still, mentions of a “bottom” rose 42% Y/Y. Historically, such a jump has often marked an inflection in EPS. The worst of the de-stocking cycle appears to be behind us and the potential for a pick-up in activity post-election could also be a tailwind into 2025. Consensus capex over the next year for the four hyperscalers is up 10% since Oct 1. AI (Artificial Intelligence) investment continues but Head of U.S. Equity and Quantitative Strategy Savita Subramanian points out that capex growers have consistently underperformed during investment cycles. Stocks moved an average of 5% after earnings, the second largest such increase since 2014.
The growth of renewables has coincided with lower power costs in Europe.
Baseload prices in Germany, France, and the U.K. have fallen below €100/MWh on average in recent months, from a peak around €500/MWh in August 2022. Head of Global Commodities Research Francisco Blanch notes that renewables account for roughly half of total power generation in Northwest Europe (NWE). Along with higher wind speeds and new highs in solar generation this year, hydro has risen 5.6GWa, the largest increase of any generation source. Record precipitation across NWE (+15%y/y) has made up for drought conditions in 2022. Gas, on the other hand, has seen the largest decline of any fuel source, falling as much as 47%y/y in France. NWE is expected to add just 18GW of gas capacity through 2026 vs. 100GW of additional wind and solar capacity. Higher renewable power supply should contribute to lower reliance on thermal fuels and a 50GWa power surplus in Europe by 2030.
High-yield (HY) issuance rebounded back to historically normal levels in September, helped by spreads, which are close to historical lows, and by lower interest rates.
More recently, HY offerings have taken a step back as rates have risen. So far, though, the increased issuance seen has mostly been used for refinancing, and net credit creation has remained at low levels relative to history. That also suggests there’s plenty of room for growth in net credit, with future proceeds used for everything from capex to M&A. This more discretionary issuance will be dependent on lower rates. Oleg Melentyev suggests in this week’s Global Research Unlocked podcast that HY is a great example of the Fed transmission mechanism at work. Capacity for more issuance shows what may lie ahead if the Fed keeps cutting, as our U.S. Economics team expects, but long rates also need to remain well behaved.
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