M&A is back and corporate earnings are up. Do America's biggest companies need rate cuts?

MW M&A is back and corporate earnings are up. Do America's biggest companies need rate cuts?

By Joy Wiltermuth

Investors don't seem too worried about the potential for a big blowup in corporate debt or a looming recession

Big public companies are putting up strong earnings, easily obtaining financing and building up a big M&A pipeline.

America's largest companies aren't making a slam-dunk case for the White House in its campaign to convince the Federal Reserve to quickly slash interest rates.

Earnings growth for investment-grade companies was resilient in the past three months, despite concerns about how big businesses will handle President Donald Trump's tariffs.

That could change quickly. Thursday's wholesale-price data for July show the biggest increase in three years, which could be the first major alarm bell signaling eventual tariff costs.

But for now, after nearly 93% of U.S. public companies with investment-grade credit ratings have reported second-quarter results, the annual earnings growth rate was pegged at 7.6% by BofA Global strategists.

That was 7.8% more upside than anticipated at the start of the season, and well above the 3.7% prepandemic average, according to credit strategists Yuri Seliger and Sohyun Marie Lee.

Earnings at U.S. investment-grade companies were much higher than expected in the second quarter.

Mergers and acquisitions also have picked up this summer, with the pipeline of deals that could be financed with investment-grade corporate bonds growing to $423 billion in July, the highest since April 2019, according to BofA Global.

The IPO market, instead of going quiet this summer, has been on fire in August, as MarketWatch's Steve Gelsi wrote.

"The word uncertainty is certainly on everyone's lips," said Christian Hoffmann, head of fixed income at Thornburg Investment Management. But while there are jitters around tariffs and the path of interest rates, there has also been strong appetite for corporate bonds, a deregulation push and the return of "frothier" aspects of the marketplace.

"SPACs are making a comeback, and meme stocks," Hoffmann said, referring to special-purpose acquisition companies, while also including mergers and acquisitions in the camp of indicative "top of the market" trends.

The White House and markets

Treasury Secretary Scott Bessent said Thursday that he wasn't trying to tell the Fed what to do, a day after he made the case for a jumbo rate cut in September followed by additional steep cuts. A pair of Fed officials said Thursday they were cool to the idea of a rate cut next month.

The Fed cut its short-term policy rate by 100 basis points in 2024 but has been on hold since then, leaving the rate in a range of 4.25%-4.5%.

Hoffmann said investors don't seem too worried about the potential for a big blowup in corporate debt or a looming recession, especially with bond funds attracting huge recent inflows and credit spreads on investment-grade corporate bonds sinking to 78 basis points - lows last seen in 1998, according to Fed data.

"It makes sense to take some credit risks, but as we saw in the recent past, even though corporate fundamentals are OK and balance sheets aren't particularly stretched, fear and dislocation mean that can change pretty quickly," he said.

Credit spreads widened in April and stocks plunged after Trump's April 2 "liberation day" tariffs shocked investors. That triggered a brief pause on new bond issuance from highly rated companies and a longer wait for high-yield, or "junk" rated businesses, to obtain fresh financing.

Stocks and credit spreads both help gauge risk appetite on Wall Street, with the spread on bonds measuring the level of extra compensation investors demand over a risk-free rate BX:TMUBMUSD10Y like Treasurys. Spreads narrow during risk-on periods but can gap out suddenly when jitters arise or concerns about the economy grow.

Related: Why tariff-driven inflation and a weakening labor market haven't been bad for U.S. stocks

In a bullish recent sign, new junk-bond issuance topped $30 billion in July, the busiest for that month in at least two decades. Also, the S&P 500 index SPX and Nasdaq Composite Index COMP set fresh record highs this week, but all three major indexes were lower Thursday on jitters about tariffs and higher prices. The S&P 500 was still up 9.9% on the year.

Still, many companies now face a "crucial stage" of needing new orders, with a lot of inventory that was front-loaded to avoid higher tariffs now in need of replenishment, according to Jordan Rizzuto, chief investment officer at GammaRoad Capital Partners.

"This is just beginning now and likely will have a much greater pricing impact," Rizzuto said, adding that he sees a lot bigger chunk of the tariff costs being passed on to consumers in the new year.

Still, the ICE BofA U.S. Corporate Index was kicking off a 5.49% return on the year through Thursday, versus an 4.83% return for the broader Bloomberg US Aggregate Index AGG, according to FactSet.

-Joy Wiltermuth

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August 14, 2025 15:02 ET (19:02 GMT)

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