The Dark Side of the U.S Speculative-Grade Defaults
The Sectors that will default in 2025-2026
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We have consistently monitored the credit markets since early January 2025. Continual high inflation and the reinstatement of student loan payments in 2025 are starting to hinder consumer discretionary spending.
According to the latest data from S&P,1 strain on financing conditions, economic output, and corporate planning due to increased tariffs could keep the default rate near current levels of roughly 4% through March 2026.
However, there is a problem.
The Credit Market WARNING
The S&P stated that without a resolution, if the final tariff levels are high or negotiations remain ongoing, an uptick in uncertainty after midyear could lead to a pessimistic projection of a 5.5% default rate through March 2026.
However, if a resolution concerning tariffs is reached, the S&P expects a speculative grade default of 4% through March 2026.
Collateral Damage:
The collateral damage from the corporate default risks can be higher during this cycle. A significant volume of speculative-grade debt matures in 2025–2026, creating a refinancing cliff.
Factoring in the persistent chaos regarding tariffs and economic policies, we expect S&P’s pessimistic projection of a 5.5% default rate through March 2026 to be a highly likely scenario.
Our research in the auto sector and consumer credit further indicates that corporate defaults will lead to job losses (before and after the default), reduced consumer spending, persistent inflation, and little to no growth, leading to sticky stagflation.
The American Economy relies on consumer spending. Downside risks prevail with much of the speculative-grade population reliant on consumer spending. Increased delinquency rates and a prolonged period of high interest rates across multiple credit channels could further erode consumer confidence in the face of tariff uncertainties.
Writing on the (Debt) Wall
A significant volume of speculative-grade debt matures in 2025–2026, creating a refinancing cliff.
Companies without strong balance sheets are at risk of default or distressed exchange.
Consumer discretionary, commercial real estate, healthcare (especially PE-backed), and media/entertainment face elevated default risk.
The Federal Reserve's extended period of higher interest rates has raised borrowing costs.
Access to credit, especially for lower-rated companies, is more restricted, making refinancing difficult.
Historical and Projected Corporate Default Rate: An Analysis
We have been publishing on the consumer credit crunch and policy uncertainty.
The United States economy has not experienced organic consumer resilience in a long time. Over the last few years, the economy's “resilience” has not been maintained by resilient consumer spending but by government stimulus.