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Earnings growth persists... Although consensus estimates for second quarter earnings growth were steadily lowered during the quarter — from +9.3% at the beginning of April to +4.9% at the end of June — actual earnings for S&P 500 Index companies have been surprising to the upside. With 90% (450 companies) having released their quarterly financial results as of 08 Aug, the blended earnings growth rate (combining actual earnings with estimates for those remaining) stood at +11.8% year-over-year. This positive showing comes despite weak sentiment and heightened volatility amid tariff driven uncertainty. If the number holds or increases further, it would mark the third consecutive quarter of double-digit earnings growth. (Earnings data source: FactSet)
...but will economic resilience desist? Just as earnings have surprised to the upside in the face of the Trump administration's sharply higher tariffs, so too had the underlying U.S. economy until recently. However, last week's release of the ISM Services Purchasing Managers Index (PMI) for July showed the service sector of the economy barely expansionary at 50.1. (PMI readings below 50 indicate contraction.) This weakening in what has generally been resilient performance by service industries since the depths of COVID is a notable shift. In contrast, ISM's Manufacturing PMI has been below the 50 threshold in 31 of the past 33 months (Figure 1).
Slower manufacturing and service sector activity, along with a much softer-than-expected July jobs report (including shocking downward revisions to nonfarm payrolls for May and June) may be the clearest signals yet of a decelerating economy. The weaker data could potentially expedite U.S. Federal Reserve rate cuts, but markets are already worried that the lowered rates may turn out to be too little, too late to fend off an outright recession.
Investors concerned about narrow equity market leadership, stretched valuations and the prospect of recession may want to consider diversifying their portfolios by allocating to asset classes that have shown fortitude in pprior economic slowdowns and could be positioned to benefit from a probable drop in rates.
Concerned investors may want to consider asset classes that could benefit from a drop in rates.
Within the preferreds market, we favor $1000 par and CoCo securities.
Portfolio considerations
Currently, we like areas of fixed income with higher yields and shorter duration, providing a potential buffer against interest rate moves. While we expect interest rates to decline over time, the path to lower rates may be volatile. This environment looks well-suited to preferred securities, which may offer attractive levels of income. Moreover, preferreds are issued primarily by banks, where fundamentals are sound: Both U.S. and European institutions passed their 2025 stress tests with flying colors, and second quarter bank earnings were again robust. From a credit perspective, most issuers of preferred securities are investment grade at the senior level, and most preferred issues are BBB rated at the security level - making this a high quality asset class.
Year-to-date, total returns have been solid for all three segments of preferreds, with contingent capital securities (CoCos) up +6.6%, followed by $1000 par securities (+4.6%) and $25 par securities (+2.5%). While spreads across fixed income sectors are tight, preferred spreads remain above historic lows.
Within the preferreds market, we favor $1000 par and CoCo securities. Both are more compelling on a risk-adjusted basis, with meaningful levels of income and lower duration compared to $25 par preferreds, and they also offer better liquidity.
On balance, we think exposure to preferreds is best managed using an active rather than a passive approach. Some preferreds offer tax efficiency, as income may be considered qualified dividend income (QDI) and is taxed at 20% rather than at higher ordinary income tax rates. We anticipate continued strong investor demand for tax-efficient solutions. Active portfolio managers can emphasize both tax efficiency and larger allocations to the $1000 par segment, which has significantly outperformed $25 par, +7.4% versus +1.6% on a three-year basis as of 31 Jul (Figure 2).
Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic "deep dive" discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
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Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time.
Investing in preferred securities entails certain risks, including preferred security risk, interest rate risk, income risk, credit risk, non-U.S. securities risk and concentration/ nondiversification risk, among others. There are special risks associated with investing in preferred securities, including generally an absence of voting rights with respect to the issuing company unless certain events occur. Also in certain circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. As with call provisions, a redemption by the issuer may negatively impact the return of the security held by an account. In addition, preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore will be subject to greater credit risk than those debt instruments. Credit risk is the risk that an issuer of a security will be unable to make dividend, interest and principal payments when due. Interest rate risk is the risk that interest rates will rise, causing fixed income securities prices to fall. Income risk is the risk that the income will decline because of falling market interest rates. This can result when an account invests the proceeds from new share sales, or from matured or called fixed income securities, at market interest rates that are below the account’s current earnings rate. An investment in foreign securities entails risks such as adverse economic, political, currency, social or regulatory developments in a country including government seizure of assets, lack of liquidity and differing legal or accounting standards (non-U.S. securities risk). Preferred security investments are generally invested in a high percentage of the securities of companies principally engaged in the financial services sector, which makes these investments more susceptible to adverse economic or regulatory occurrences affecting that sector concentration/nondiversification risk). It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
Nuveen, LLC provides investment services through its investment specialists.
This information does not constitute investment research as defined under MiFID.
