22 October 2026
For professional clients only. The information contained within this post is not intended for retail clients.
The growing divide between America’s largest companies and smaller businesses reveals a more complicated picture of corporate health than headline indices suggest. While mega-cap technology companies benefit from strong cash reserves and AI investment, smaller firms face mounting financing costs, refinancing pressures and weaker financial flexibility.
First, raising capital is becoming more challenging. Companies unable to fund investment internally may issue new shares rather than take on expensive debt. Although this avoids additional interest costs, repeated issuance dilutes existing shareholders and can constrain earnings growth per share. Larger companies have greater flexibility to finance expansion from their own resources.
Second, private credit is changing how financial stress emerges. Businesses struggling to refinance can negotiate extensions or more flexible repayment terms with private lenders. While this can help viable companies navigate difficult conditions, it may also delay the recognition of underlying financial weakness.
Credit markets are increasingly differentiating between borrowers. The most recent figures on 20 October show US high-yield spreads had widened to 333bps, up 17bps in a week, while spreads on CCC rated and lower debt reached 1,327bps, up 60bps over the same period. Investment grade spreads stood at 87bps, up 4bps on the week. This divergence suggests investors are demanding significantly greater compensation for lending to weaker businesses.
Moreover, reported earnings may not tell the whole story. Capitalising eligible software development and technology costs can support near-term reported margins, although the expense is recognised over time. With AI investment accelerating, cash flow and earnings should be examined together to assess whether reported profitability translates into financial strength.
Finally, higher borrowing costs are widening the divide between large and small companies. Many large businesses locked in low fixed rate financing before interest rates rose, whereas smaller firms are generally more exposed to floating rate debt and refinancing. Rising interest expenses can absorb operating gains, even where underlying businesses remain sound, helping explain why mega-cap indices can outperform while financial pressures build elsewhere.
There is a case for holding some high-quality government bonds as a defensive counterbalance. At time of writing, the US 10-year Treasury yield has fallen nearly 6bps to 5.06%, this morning, as technology weakness and geopolitical tensions prompted a flight to safety. Treasuries could provide diversification if growth weakens, although persistent inflation and fiscal concerns remain risks.
The message is not to abandon risk assets, but to recognise that headline market strength can mask uneven corporate resilience. Sometimes, having some bonds on your side makes sense.