Is Leverage an Issue in Equity Markets?

Leverage (net of cash holdings) remains relatively low for constituents of the S&P 500, both from a historical and cross-sectional perspective. However, it is a different story for the broader universe of US firms for whom net debt is approaching 5x their earnings compared to a long-term average of around 3.5x. European firms’ leverage is only slightly healthier, despite having delevered significantly since 2009, when net debt was about 11x earnings. This means that small and mid cap companies in the US, as well as European firms, could be more vulnerable to any slowdown in corporate earnings or deterioration in the macro picture.

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