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What’s Next for the Credit Cycle? 

BY TOM FAHEY, CO-DIRECTOR OF MACRO STRATEGIES, AND TYLER SILVEY, CFA, GLOBAL
MACRO STRATEGIST, ASSET ALLOCATION

Key Takeaways

  • We believe the US economy will remain in late cycle in the near term, but we expect stalling growth, higher inflation and potential for further volatility.
  • We expect tariffs to act as a drag on growth and the economy, though the effect may be partially offset by fiscal impulse from the One Big Beautiful Bill Act (OBBBA).
  • Despite cooling labor market data, we are not expecting a massive wave in layoffs. We view corporate health as the lynchpin behind the labor market and corporate earnings have been strong.
  • The Federal Reserve (Fed) seems willing to consider tariff-related inflation a temporary increase, especially in light of the weakening labor market. We expect more cuts to come and will be watching forward guidance closely.

CreditCycle-for web_5.22

Graphic Source: Loomis Sayles. Views as of 25 September 2025. The graphic presented is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and, therefore, should not be the basis to purchase or sell any securities. Any opinions or forecasts contained herein reflect the current subjective judgments and assumptions of the authors only, and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. This information is subject to change at any time without notice.

Volatile Dynamics

Despite the uncertain and volatile policy backdrop, the economy seems to be holding up. Risk appetite remains strong. Inflation is starting to gradually pick up with early signs of tariffs passing through to goods prices. We expect that trend to continue in the coming quarters. Weaker labor market data has prompted another Fed interest rate cut and markets are pricing for further easing into year end.

Labor market data has been cooling, but we do not expect a massive wave in layoffs as long as corporate health remains solid. Corporate earnings have been strong. Our most recent survey of Loomis Sayles’ credit analysts (our Credit Analyst Diffusion Indices, or CANDIs), conducted in June, signaled late-cycle dynamics and mounting cost pressures. The Loomis Sayles Credit Health Index (CHIN) is currently at a level consistent with late cycle. 

We believe profits are one of the most important indicators to watch because they drive the cycle. If declining demand or increased costs hit margins and profits turn negative, then companies are more likely to start shedding labor. A rise in unemployment is a key signal for the downturn phase of the credit cycle.

A Closer Look

In our view, credit cycle analysis requires art and science. We track key economic indicators that tend to behave differently in each phase of the cycle, and put them into context using our credit cycle framework and collective experience. Currently, these indicators primarily fall within expansion/late cycle. We believe the credit cycle remains in late cycle based on the strength of bottom-up fundamentals. At this stage of the cycle, investors tend to focus on capital preservation and moving up in quality.

 

Credit Cycle Table0929

Table Source: Loomis Sayles. Views as of 25 September 2025. Highlighted cells represent attributes we’re currently observing. Green represents our current view. Bright blue represents the previous view (if different from the current view). Arrows indicate the direction of change in view where applicable. The table presented is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and therefore, should not be the basis to purchase or sell any securities.

What’s Next?

Because macroeconomic factors don’t always behave as expected, we prepare scenarios for the path of the US credit cycle over the next six months. Here are three potential scenarios and indicators to watch:

Base Case
Late Cycle/Stallflation

  • In this scenario, tariffs and uncertainty lead to stalling growth, but the economy does not slip into recession. We could see more volatility as we get softer data, but ultimately risk appetite should hold up.
  • Stagflation gets talked about a lot, but we believe that term implies a 1970s scenario with a much more bearish shading to inflation, unemployment and asset prices than what we currently anticipate. We prefer “stallflation” for this scenario because we see real GDP growth slowing toward “stall speed,” around +/- 1%, as the economy adjusts to a historically high tariff rate.
  • Earnings expectations remain solid, which should help to limit layoffs.
  • Consumption growth slows, but we don’t see a big pullback in consumer spending. In aggregate, consumers still have jobs, built-up wealth and healthy balance sheets.
  • Labor market softening paves the way for more Fed cuts, but higher inflation keeps the Fed from easing too aggressively.

Alternative Scenario
Downturn

  • In this scenario, the new tariff regime results in labor market weakness. Profits go negative or undershoot consensus expectations, leading to layoffs and a sharply higher unemployment rate. A rise in the unemployment rate is a lagging indicator, but it defines a recession.
  • With more job losses realized, consumer spending and activity pull back sharply.
  • Inflation rises in the near term, but demand destruction ultimately levels it out. The Fed cuts, rates rally and risk appetite plunges.

Alternative Scenario
Late Cycle/Resilient 

  • In this scenario, front-loaded tax cuts provide fiscal fuel for the economy. Growth expectations stay elevated (or rise), supporting a strong risk backdrop.
  • Healthy demand keeps profits elevated and unemployment low (especially with softer labor supply).
  • Inflation moves higher as baseline tariffs stay in place and demand keeps services inflation sticky. The Fed is more hesitant to cut rates, pushing yields higher.


Macro Themes in a Flash

Our views on key topics that can influence the credit cycle. 

The US Consumer

Our view: The consumer still appears fairly healthy in aggregate, but we see some vulnerabilities, particularly among lower-income consumers.  

The details: Higher-income households continue to spend at favorable rates. Lower-income households, a much smaller segment of total spending, are showing weakness. The OBBBA is expected to benefit middle- to upper-income households more than lower-income households. Spending may slow from very elevated levels given uncertainty and higher inflation. We’ll be watching the wealth effect closely—it has been a large factor propping up spending over the past few years. 

Global Growth

Our view: Shifting global trade dynamics continue to hang over the global economy. We view tariffs as a tax on growth. Encouragingly, many countries have the ability to increase fiscal spending to support their economies if needed. 

The details: In our view, the risk of global trade seizing up and causing widespread recession has diminished. Although we have more clarity on tariff policy, uncertainty around the legality of IEEPA tariffs[i] and future tariff policy remains. Current tariff rates are much more elevated than expected at the beginning of the year and we may see some friction as the global economy adjusts.

[i] Tariffs imposed with the use of the International Emergency Economic Powers Act.

US Monetary Policy

Our view: Softer labor market data has paved the way for the Federal Reserve to continue its easing cycle.  

The details: The Fed seems willing to consider tariff-related inflation a temporary increase, especially in light of a weakening labor market. We expect more cuts to come and will be watching forward guidance closely. 

US Corporate Profits

Our view: Corporate earnings growth has been very strong, handily beating expectations. We expect equity earnings-per-share (EPS) growth to remain solid through year-end 2025 and into 2026. 

The details: Large-cap earnings could achieve double-digit growth rates for calendar year 2026. We believe earnings growth can broaden out later this year and into next year. Until then, we expect the technology and communication services sectors to maintain leadership.  

US Credit Risk Premium/Risk Appetite

Our view:  Credit spreads were very tight at the start of 2025. We saw a short-lived spike in early April as tariff panic dominated market narratives, but the retracement since then has been impressive. Risk premiums look tight. 

The details: Credit fundamentals still look solid and the technical backdrop has helped push spreads to tight levels. Compressed credit spreads have led us to look for value in other segments of the fixed income markets. We would view further spread widening as an opportunity because all-in yield remains attractive and aggregate credit fundamentals still look relatively healthy. 

Inflation

Our view: We expect US inflation to rise over the next few quarters, then begin to ease through 2026. 

The details: We may not be seeing the inflation surge that was feared, but signs of tariff impact are beginning to show in goods prices. On the flip side, we believe the cooling labor market could contribute to softening wage growth and services inflation. If the unemployment rate drifts higher as we expect, we believe inflation will ultimately resume its downward trend toward the Fed’s target. 

The US Dollar

Our view: We believe the US dollar has room to drift lower; it appears the US administration would welcome a weaker dollar. 

The details: Market expectations for Fed rate cuts help prevent a dollar rally, in our view. Additional hedging activity by non-US-based investors would also support a continuation of the weakening dollar trend. We maintain a favorable view on non-US-dollar assets, including some G10 currencies. 

China

Our view: Sluggish household income growth has contributed to persistently weak consumer confidence and high precautionary savings. We still have questions about the quality and sustainability of growth moving forward. 

The details: The tariff reprieve has been welcomed, but a durable resolution may be more challenging. The current mix of export reliance, deflation and property sector weakness underscores the need for new growth drivers to power a genuine recovery through the end of 2025.

Disclosure

All insights and views are as of 25 September 2025, unless otherwise noted.

This marketing communication is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein, reflect the subjective judgments and assumptions of the authors only, and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. There is no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis does not represent the actual, or expected future performance of any investment product. Information, including that obtained from outside sources, is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This information is subject to change at any time without notice.

Indices are unmanaged and do not incur fees. It is not possible to invest directly in an index.

Commodity, interest and derivative trading involve substantial risk of loss.

Any investment that has the possibility for profits also has the possibility of losses, including the loss of principal.

Markets are extremely fluid and change frequently.

Past market experience is no guarantee of future results.

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Tom Fahey
Co-Director, Macro Strategies, Portfolio Manager