Big bird's feeling the pinch - Global market update

Given the nature of the programmes, many people might assume that Sesame Street and The Muppet Show originated from the same stable. But although there were some cross-over episodes and character appearances (most of the puppets were created by Jim Henson), Sesame Street was an educational programme created by Joan Ganz Cooney and Lloyd Morrisett and produced by the Children’s Television Workshop that premiered in 1969 and has run for 53 seasons – for the record, it is still running today!

For those that grew up watching it, you will remember that at the end of each programme you were told that the episode was brought to you by the letter “ “ and by the number “ “, so when you consider there are only 26 letters and the programme focused on only the first ten numbers, to get over 4,700 episodes out of the format is no mean achievement! Anyway, the reason for this walk down memory lane is that for the last year it could be argued that the US “has been brought to you by the letter K”, with the increasing focus on a K-shaped economy.

The renewed discussion on the state of the consumer in the US has its roots in the substantial uplift in the oil price following the first attacks on Iran, and while Donald Trump has attempted to dismiss the rise in oil prices by claiming that the US is actually a beneficiary as a net exporter – and that may be technically true – it’s also the case that the benefits are very unevenly distributed, as anyone who has recently filled up their car with petrol can attest.

At its core, the K-shaped economy is one of the haves and the have-nots – those in a position to benefit from high energy prices (or, indeed, high AI investment) are doing swimmingly in the current environment, while those whose effective disposable income is significantly impacted by energy prices are struggling. There will be those that argue given the now significant presence of retail investors in financial markets, that they should be in a position to take advantage of AI/energy windfalls via ownership of related securities, but that’s an option that’s not necessarily available to those residing in the lower leg of the “K”.

As Q1 earnings season comes to a close, a long list of consumer-focused companies have pointed to a strained, price-sensitive consumer, declining confidence among consumers and overall reduced spending. And while the official retail sales numbers have looked better than the anecdotal evidence, a closer examination of the credit card data would point to a population relying on ‘their flexible friend’ more often these days. But even here, there is evidence of mounting strain. A recent report showed that 13.1% of credit card balances are now 90+ days delinquent – the highest level since 2011; for student loans, that figure is 10.3% (highest since 2020). Across all forms of consumer credit, the pace of repayment of loans is stretching out.

Arguably, there is a similar K-shaped distribution emerging in the business sector. Cost pressures, competitive dynamics and margin concerns are showing up across many sectors, while labour cuts and restructuring announcements are reinforcing a broader slowdown narrative.

Adding to the pressure is the fact that bond yields have also been on the rise in the US – this is important as the majority of borrowing in the US is referenced from these rates rather than the Federal Reserve (Fed) rate. This is a global trend and is a function not only of headline inflation risks – and the policy response that could ensue – but also of issuance patterns. This is the AI trade’s thirst for capital: Meta has issued a load of dollar debt this month; Amazon has announced a big Swiss-franc offering; and Alphabet has sold bonds in Canadian dollars and euros, with a further slate of yen-denominated bonds to be sold later this month.

Total dollar-denominated corporate bond issuance has crossed the $1 trillion barrier for 2026 already, the earliest that this threshold has ever been breached. Indeed, issuance continues to run ahead of the Covid-year borrow-bonanza, which is particularly notable given that interest rates are a hell of a lot higher today than they were back then – remember those zero or less than zero interest rates? It also marks a significant step-jump up in the pace of issuance from recent years.

All the while equity markets continue to register new highs, driven on by the AI frenzy stoking fears of missing out/animal spirits and flattering aggregate profit numbers for the market as a whole and disguising the strains of what lies beneath.

Going back to our friends on Sesame Street, at some point Count Dracula might start listing off the growing number of concerns and the lightning bolt will strike, but for now it seems investors aren’t interested in working out “which of these kids are doing their own thing”.