Profits, policy, and capital scarcity: The new credit market regime

Over a year since the One Big Beautiful Bill Act (OBBBA) passed, its effects on corporate profitability are becoming clearer. Earnings have not only materially accelerated—they have improved in quality. The gains have not been driven primarily by financial engineering or cost‑cutting. Instead, they reflect a fiscal policy backdrop that reinforced a broad‑based capex cycle centered on artificial intelligence (AI) infrastructure, power demand, and domestic manufacturing.

The link between fiscal policy and corporate profits

When the OBBBA was first enacted, market attention focused primarily on its fiscal cost, while its potential implications for corporate profitability were largely overlooked, though not by us. Our analysis was grounded in the Kalecki‑Levy profits identity,¹ a macroeconomic framework that links fiscal flows to private sector profitability.

Unlike traditional earnings models which are based on bottom‑up forecasting of revenues and margins, the Kalecki‑Levy approach highlights how profits are shaped by sectoral financial balances across households, government, and the foreign sector.

At its core, the Kalecki‑Levy profits equation is a macroeconomic identity derived from the national accounting relationship between savings and investment:

Corporate profits = Investment – Household savings – Government savings – Foreign savings

The framework implies that corporate profits tend to rise when private investment rises and/or when the public sector maintains a deficit. The framework shifts the focus away from firm‑specific drivers of profitability toward broader macroeconomic flows. That macro‑to‑micro link formed the foundation for our outlook and expectation that the OBBBA would provide an uplift to corporate profitability. In many respects, our thesis understated the magnitude of the profit cycle that followed.

Investment‑driven fiscal support matters for credit markets

The key insight was never simply that “deficits are stimulative.” Markets often frame the debate around fiscal deficits in binary terms—whether they are “good” or “bad” for the economy. That framing, however, misses the underlying mechanism. Fiscal policy matters because government deficits ultimately become private sector income. The more important question is where those flows go, who captures them, and whether they finance productive investment, fuel speculative excess, or create inflationary bottlenecks.

What we have seen over the past several years is fiscal policy shifting away from consumption‑driven support measures and toward investment‑led initiatives. That evolution matters for credit markets because investment spending can help create a cycle of stronger cash flows, healthier balance sheets, and ultimately higher corporate earnings. The primary beneficiaries have largely been capital‑intensive sectors—including hyperscalers, utilities, semiconductors, and higher‑quality investment‑grade rated corporates with balance sheet flexibility.

New cycle—From growth to capital scarcity

The market continues to underestimate that this is no longer simply a growth story. It is increasingly a story of inflation and capital scarcity. The first phase of the cycle was about demand creation. The next phase is about resource constraints.

AI infrastructure spending has become a macroeconomic variable. Data centers, power infrastructure, and semiconductors, now represent one of the largest coordinated capital spending cycles in decades. Importantly, this capex wave is occurring at the same time as elevated fiscal deficits, higher corporate refinancing needs, labor and resource constraints, and growing competition for long duration capital. Together, these dynamics change the investment environment materially.

The post‑global financial crisis (GFC) period was defined by abundant liquidity, suppressed volatility, low capital costs, and limited inflationary pressure. In that world, duration itself was scarce because central banks absorbed so much of it through quantitative easing and balance sheet expansion.

Today’s environment looks different. The private sector is now being asked to absorb a growing supply of duration, finance more infrastructure, and fund larger capex programs—all as fiscal policy remains expansionary. That creates a fundamentally different backdrop for rates, credit spreads, and asset allocation.

Importantly, this does not necessarily mean fiscal policy is a “crisis.” Markets continue to underestimate that large deficits can coexist with strong corporate profitability for extended periods, particularly when the fiscal flows support investment and nominal growth rather than simply consumption. The real constraint is not likely to be solvency, but inflation, resource availability, and balance sheet absorption.

That distinction matters because it changes how investors should think about opportunity and risk. The next stage of the cycle likely becomes far more dispersed. Passively owning the broad market may become less effective than understanding the following:

• Who captures the capex?
• Who provides the financing?
• Who absorbs the growing supply of duration?
• Who faces margin pressure from inflationary bottlenecks?

In credit markets, that likely favors higher‑quality issuers with durable free cash flow, well‑structured securitized assets tied to hard collateral and cash flow visibility, and investment‑grade issuers with access to multiple financing channels across public and private markets.

Financing capacity a constraint in new cycle

The market may ultimately discover that the binding constraint in this new cycle is not demand destruction, but financing capacity itself. Long duration assets may face structurally higher volatility as private markets have to absorb greater duration supply. This is also why the line between public, private, corporate, and securitized markets may continue to blur.

Public markets will continue to provide liquidity and credit exposure. Increasingly, however, unique capital solutions may be funded in private placements, such as the 144a and 4a2 markets, where value can be captured through origination, structure, and liquidity premium. As the investment cycle broadens, the ability to participate in and provide capital solutions is likely to become an increasingly valuable source of alpha for investment‑grade credit investors.

Our original thesis—that the OBBBA would support corporate profitability—has largely played out, and the next phase of the cycle is now underway. We are moving further into an environment that is likely characterized by structurally larger deficits, elevated nominal growth, sustained capital spending, more persistent inflation, and balance sheet capacity itself becoming a scarce asset. That is a very different market regime from the one investors became accustomed to in the post‑global financial crisis era. The opportunity set remains attractive, but success in the next phase of the cycle will require greater selectivity and deeper balance sheet analysis to identify the potential winners and losers of this new capital cycle.