Need to Know: The ‘beating heart’ of the economy may be ready to trigger a recession, says this strategist


At last, it’s time to send August packing — take your heat waves and miserable summer weather and begone.

As for stocks, a recent string of wins has whittled the S&P 500’s SPX monthly loss to 1.6%, though it’s still shaping up the worst since February, with a stormy September looming.

But spare a thought for the Russell 2000 RUT small-cap index, set to lose nearly 5%. While up 8% on the year, the interest-rate sensitive group of stocks has battled for returns this year:


That brings us to our call of the day from Société Générale’s poke-the-bear strategist Albert Edwards, who updated his “maddest macro chart” showing why U.S. corporate profits have held up so well during rate hikes.

As he explained in July, those profits have delayed a U.S. recession because companies have largely been net beneficiary of higher rates. Corporates borrowed long-term at 2020 and 2021’s low rates, then lent money back via Treasury bills and other vehicles at higher short-term rates.

The “maddest” chart

Société Générale/Datasteam

However, in his note to clients on Wednesday, Edwards declares that “beneath the megacaps, the vast bulk of companies are in big trouble.” Yes, he’s talking about smaller companies.

The strategist who has devoted time to talking about corporate greedflation this year, spent much of his August break picking the brains of colleagues like the bank’s head of quant equity research, Andrew Lapthorne. He says a big fall in aggregate corporate interest payments “masks a big divergence in fortunes,” as shown in his chart:

“It stands to reason that smaller quoted companies in the Russell 2000 index, as well as unquoted companies, don’t have as much access to corporate bond issuance so have been unable to lock into the near-zero long-dated fixed borrowings that the larger companies have,” writes Edwards.

With that, he walks back his July conclusion that the U.S. is “practically immune from rising rates. Large and megacaps might be immune, but the explosion higher in corporate bankruptcies is sending a clear message,” he says.

He points to S&P data showing 402 corporate bankruptcies so far this year, nearly equal to 407 seen in 2020 and only higher during the global financial crisis. Look out for August data from the American Bankruptcy Institute, he advises. And citing the Fed senior loan officer opinion survey, Edwards says a willingness by U.S. banks to lend to small and large companies is now at recessionary levels.

But the real issue is that smaller companies remain the lifeblood of the U.S. economy, providing a chunk of jobs, he says. That’s as the megacaps may be the “vampires sucking the lifeblood” out of those corporates and others.

Edwards concludes. “It seems the lights are going out all over the U.S. smaller-cap corporate sector. They weren’t able to lock into long-term loans at almost zero interest rates and pile it high in the money markets at variable rates.” Ultimately that pain may trigger a recession, and maybe even the bigger companies will start to wobble.

The markets

Dow futures YM00, +0.47% are up 120 points, while those for the S&P 500 and Nasdaq-100 ES00, +0.26% NQ00, +0.16% are mixed. The 10-year Treasury yield BX:TMUBMUSD10Y is slightly lower at 4.103%. China stocks XX:000300 slipped on data showing another contraction in manufacturing activity.

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The buzz

Dollar General DG, +1.72% stock is tumbling after the discount retailer missed on earnings and cut guidance. Campbell Soup CPB, -0.76% and Hormel Foods HRL, -0.38% are ahead, with Broadcom AVGO, +0.26% due to report after the close.

Salesforce shares CRM, +1.45% are up over 5% after the software giant delivered a strong outlook and improved margins. Okta OKTA, +2.38% is up more than 10% after the ID-management software group lifted its annual earnings outlook. Five Below FIVE, +0.15% stock is off nearly 7% after the retailer said it would tweak guidance to account for bigger-than-expected “shrink.”

Shopify shares SHOP, +2.06% are up over 5% after Amazon AMZN, +0.12% announced an enhanced collaboration with the e-commerce platform.

China search engine and AI group Baidu BIDU, +3.11% released its AI chatbot to the public and shares are up 3%.

UBS UBS, +0.60% is up over 4% after the Swiss bank reported a record $28.88 billion net profit.

Weekly jobless claims are due at 8:30 a.m., along with the Fed’s favorite inflation gauge, the personal-consumption expenditures price index. That’s all a day ahead of the August jobs report.

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