North American 2025 Industrial Outlook: Stable, but Politics Will Keep It Interesting

Our outlook for North American Industrials in 2025 is stable. We believe the credit risk profiles of our issuers will remain mostly supportive of their credit ratings. However, some companies will experience different performances. Investment-grade companies remain the best positioned in their current rating categories to effectively navigate any operational disruptions stemming from potential trade and policy issues. On the other hand, non-investment-grade companies and those dependent on cross-border trade will be the most exposed to downward ratings pressure.

Key Highlights
-- Diversified industrial companies associated with the provision of products and/or services related to key growth areas should experience higher demand than other industrials.
-- While new U.S. trade policies could add substantial friction to supply chains and push input costs higher, lower taxation and less regulation should affect demand across a range of industrial segments.
-- U.S. corporates should increase capex relative to their Canadian and Mexican peers.
-- Low-growth expectations across the sector, reasonably well-managed balance sheets, and declining borrowing rates imply an increasing potential for shareholder rewards and M&A transactions. Companies could increasingly add debt to fund such initiatives.

"Barring any negative surprises on trade, our outlook for the North American industrials is largely stable and the credit risk profiles of our issuers should remain commensurate with their credit ratings," said Vineet Khattar, Vice President, Diversified Industries. "Investment-grade corporates should comfortably navigate any operational challenges arising from potential trade or policy changes. In contrast, high-yield companies should be the most exposed to operational disruptions from these challenges."

"Overall, low growth, declining borrowing rates, and healthy balance sheets imply scope for increased shareholder rewards and M&A transactions. This may also lead to increased issuance volumes," Khattar concluded.