Default Risk Rises For Most U.S. Sectors At May-End As Market Volatility Eases

The median default risk for publicly traded U.S. companies increased across most sectors between the end of March and May, a period marked by market volatility following tariff announcements. Insurance companies experienced the largest increase in median probability of default scores. As of May's end, oil and gas equipment/services and publishing companies exhibited the highest vulnerability based on median probability of default scores.

Analysis

The median risk of default for publicly traded US companies saw a widespread increase across most sectors from the end of March through the end of May. This period was characterized by significant market volatility, described as tumultuous with wild swings in US stocks, largely attributed to investor reactions to President Donald Trump's April 2 announcements of tariffs on US trading partners. Notably, two groups of insurance companies registered the largest upticks in median probability of default scores during these two months. As of the end of May, oil and gas equipment and services companies, alongside publishers, were identified as the most vulnerable industries based on their median probability of default scores, according to IHS Markit data. These findings reflect heightened credit stress and contribute to a moderately negative sentiment (score -0.5) and cautious market tone, underscoring the tangible market impact (score 0.6) of trade policy uncertainties on corporate financial health.

Key Decisions for Investors

• Investors should critically reassess credit risk within their US corporate portfolios, particularly in light of the broad-based increase in median default probabilities.
• Specific attention should be paid to the insurance sector, which experienced the largest rise in default risk, and to the oil and gas equipment/services and publishing industries, currently exhibiting the highest default vulnerabilities.
• Factor in the ongoing influence of trade policy and associated market volatility on sectoral credit quality when making investment and allocation decisions, potentially adopting more defensive or hedged stances.
• Closely monitor corporate credit indicators and developments related to trade tariffs, as the observed trend suggests a deteriorating credit environment for US companies.