1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 26
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Investment grade issuers are best positioned to service their debt
Interest coverage ratio
10
8
6
4
2
0
2010
2012
2014
2016
2018
High yield
2020
2022
2024
Investment grade
Source: Bloomberg Finance LP, Scotia Wealth Management | Based on EBIT
In recent years, high yield spreads and equity multiples have been almost perfectly inversely
correlated. With valuations – credit spreads and equity multiples – appearing rich across both
asset classes, the cross-asset class cushion is less effective as both markets appear priced for
perfection, leaving little valuation buffer. This supports a cautious stance on high yield, which, in
some ways, can be thought of as an extension of the equity asset class in the current
environment.
High yield spreads and equity multiples have been in sync over the last few years
15
6%
17
5%
19
4%
21
3%
2%
2021
23
25
2022
High yield OAS - LHS
2023
2024
S&P 500 12-mth fwd P/E (reversed) - RHS
Source: Bloomberg Finance LP, Scotia Wealth Management OAS = option-adjusted spread
Navigating uncertainty with discipline
If markets follow the principles of entropy by naturally accumulating complexity over time, then
a disciplined investment framework becomes the necessary counterweight. Diversification, a high
-quality tilt, and remaining invested do not eliminate volatility, but they help investors absorb it,
ensuring that short-term fluctuations do not derail long-term financial objectives. In an
environment where the narrative will continue to evolve and volatility-inducing catalysts
inevitably emerge, having that structure in place becomes even more important.
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