KBRA Financial Intelligence

3 Things in Credit: Dow and United Airlines, Big Bank Credit Color, and Consumer Hard Data

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Welcome, market participants, to another 3 Things in Credit. I’m Van Hesser, Chief Strategist at KBRA. Each week we bring you 3 Things impacting credit markets that we think you should know about.

Every week, I jot down things along the way that get me thinking. This past week, three quotes stuck with me, each worth pondering:

• FactSet said, “The actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 37 of the past 40 quarters for the S&P 500. The S&P 500 is currently expected to report earnings growth of 7.3% for the first quarter.”

• Jay Powell said, “The significant policy changes […] are likely to move us away from our goals. So, unemployment is likely to go up as the economy slows, in all likelihood, and inflation is likely to go up.”

• ECB President Lagarde said, "The economic outlook is clouded by exceptional uncertainty."

This week, our 3 Things are:

1. Dow and United Airlines. Two bellwethers face the music.

2. Big bank credit color. Oddly upbeat. Does that make sense?

3. Consumer hard data. March retail sales came in as expected, which is better than what the survey data suggested. But what will April show?

Alright, let’s dig a bit deeper.

Dow and United Airlines.

You don’t often see a Street analyst cut a recommendation on a Fortune 100 company from Buy to Sell (uh, “Underperform”) in one fell swoop, but that’s exactly what happened this week to Dow, Inc. Bank of America Securities made that call in response to what the analyst referred to as a “perfect storm” impacting the chemical company. Specifically, the analyst cited weakening macroeconomic conditions, rising feedstock costs, and increasing trade barriers as reasons for trimming his EBITDA forecasts for 2025 and 2026 by 17% and 23%, respectively. The analyst noted that the company’s reliance on housing, construction, and automotive sectors could pressure earnings amid a slowing global economy. Dow stock is down 52% over the past year, significantly underperforming the S&P 500 and the index’s Materials Group. Dow has held up better in credit, with its 5.15s of 2034 trading at an OAS of 139 bps on top of Bloomberg’s triple-B index. The company is due to report Q1 earnings April 24.

Stuff is starting to get real.

Over at United Airlines, a bellwether consumer discretionary name operating in a global marketplace, Q4 earnings came in at a record “well ahead of expectations.” In its release, management did something highly unusual. It provided guidance under two scenarios: “Stable Environment” and “Recessionary Environment.” Management explained, “The company’s outlook is dependent on the macro environment, which the company believes is impossible to predict this year with any degree of confidence.”

Under its Stable scenario, “Demand will remain consistent with weaker, but stabilized […] trends from the six weeks prior [to this announcement], along with the current forward fuel curve.” Under its Recessionary Environment, the company expects operating revenue to fall 5% in Q2 2025 through Q4 2025 below the Stable environment. That makes full-year 2025 EPS an estimated $11.50-$13.50 under the Stable environment, and $7.00-$9.00 under the Recessionary environment. Using the midpoints of each range, that puts full-year adjusted EPS anywhere from up 18% to down 25%. That makes planning difficult. As management said, it is “impossible to predict […] with any degree of confidence.” Record profits to, well, anyone’s guess.

Alright, on to our second Thing—Big bank color.

So global cyclicals such as airlines and chemical producers are facing significant earnings headwinds. What about the banks?

Judging by this week’s Q1 earnings releases, it’s all good. Really? Let’s have a look.

At JPMorgan Chase, the firm did boost its loan loss reserves by $1 billion—these are funds set aside out of earnings for future losses—“in light of the significantly elevated risks and uncertainties.” So, what is $1 billion? Turns out, not all that much to JPMorgan. That’s a 4% increase to the overall firmwide reserve. The reserve to total loans went from 1.9% at December 31 to, wait for it, 1.9% at March 31.

Credit card loan loss reserves account for just over half of the total reserve, and management clearly feels good about the quality of the book, reiterating a low 3.6% estimated loss rate. Interestingly, CEO Dimon said on the call that they should not have given a card loss forecast, as “there’s a wide range of potential outcomes.”

Elsewhere, the bank is not seeing credit weakness in the lower income segment of their book. Lower spend, yes, but not credit deterioration. On the commercial side of things, they’re watching small business, and smaller corporates for weakness, but nothing of particular concern. Mr. Dimon noted that the bank’s call on recession probability is 50%.

Over at Bank of America, there was no loan loss reserve build, and reserves to loans was essentially flat. Management has modeled its reserve based on a 6% unemployment assumption in 2025 and 2026. By the way, that is not a forecast; it’s merely a data point used to calculate modeled reserves. Actual bad debt metrics were basically unchanged at low levels across the consumer and commercial loan books. Is management worried that there’s been a sudden change? In a word, no. Loan quality remains “sound.” Its consumer risk is concentrated in very high-quality credit strata. It is not forecasting a recession in 2025.

At Wells Fargo, there was a loan loss release in Q1—yes, a modest one but a release nonetheless! The drop is largely attributed to lower reserves needed for its commercial real estate book, which has been written down significantly over the past couple of years. So even with reserves to loans basically unchanged quarter on quarter, management believes the reserve position is more conservative than it was a quarter ago.

Consumer credit continues to perform well, with more affluent customers showing strength, while less affluent customers show more stress. As for the current environment, management commented that “this is a complicated issue, and it is our current expectation that we will face continued volatility and uncertainty and are prepared for a slower economic environment in 2025.”

If we sum it all up, there is a surprising lack of concern from the largest banks about the effects of a downturn. We would attribute this to the largest banks being relatively insulated from the weakness set to come. These banks sit in the middle of the stronger part of what we call our Two Economies—larger businesses and wealthier households. There, credit is holding up remarkably well. Still, the gap in outlook between the aforementioned airline sector—which also caters to the strong part of our Two Economies—is striking. Maybe Jamie Dimon’s comment that “there’s a wide range of potential outcomes” is the real takeaway.

Alright, on to our third Thing—Consumer hard data.

With the consumer soft data (i.e., surveys) falling off a cliff, we all watched with bated breath March retail sales, the hard data, out this week. The headline showed a nice bump, +1.4% over February, while the control group (excluding autos, gas, and building materials), that which feeds into GDP, came in a bit light at 0.4% versus a 0.6% consensus forecast. It’s worth noting that February was revised up by 0.3%, so all told, not all that bad. Another case of “don’t watch what I say, watch what I do”?

Not so fast. A couple of observations. One, 2024 was an upbeat year, with household net worth jumping 9%, wage growth exceeding inflation, and unemployment remaining low. So, as consumers headed into the new year, there was plenty of spending firepower. Restaurant meals, an economically sensitive category if there ever was one, rose 1.8%.

Now add into the mix the threat of tariffs, and a case could be made that there is a pull-forward of purchases. Autos jumped 5.3% over February, building materials +3.3%, sporting goods +2.4%. All three had been falling. That said, American Express on its earnings call said there is no pull-forward of spending.

Just as 2024 provided plenty of firepower for retail sales, the negative wealth effect that accelerated amid the tariff rollout is sure to lean on the consumer’s proclivity to spend. Since mid-February, the S&P 500 is down 14%, NASDAQ -19%. And we’re seeing the beginning of that shift from consumption to savings, with personal saving as a percentage of disposable income bouncing from 3.3% in December to 4.6% in February. It’s hard to imagine that trend rolling over anytime soon. Which means retail sales likely will.

So, there you have it, 3 Things in Credit:

1. Dow and United Airlines. Tariffs are starting to bite.

2. Big bank credit color. Much of the economy is well positioned coming in to the downturn.

3. Consumer hard data. The U.S. consumer will not go quietly, but we may be at an inflection point.

As always, thanks for joining. We’ll see you next week.