David Rosenberg, a prominent U.S. economist, has expressed concerns over the recent surge in U.S. stocks following a political victory. This rally, according to Rosenberg, appears increasingly disconnected from economic realities. Despite major U.S. stock indices reaching new highs, Rosenberg, founder of Rosenberg Research, warns that this optimism overlooks key signs of corporate weakness, specifically the rise of "zombie companies."
The term "zombie companies" refers to businesses burdened with high debt that cannot generate enough income to cover their interest expenses. In recent years, the number of these companies has risen significantly. Analysis shows that by 2023, about 7,000 publicly traded companies globally fit this description, with roughly 2,000 of them in the U.S., marking a 30% increase from a decade ago.
Rosenberg highlights that this trend poses a risk to credit markets, as many small-cap stocks have been classified as "zombie companies." He notes that within the Russell 3000 Index—which comprises 3,000 companies—around 600 now fall into the "zombie" category, a 50% increase compared to the period before the global financial crisis.
He argues that the current market optimism is based on expectations of reduced regulation and taxes from the new government. However, given the slim majority in the House and bipartisan fiscal conservatism, Rosenberg suggests this is unlikely to materialize. Other market analysts also caution that the rally driven by political outcomes may fade, especially considering the high valuations of stocks. Bill Smead from Smead Capital Management warns that this momentum could lead to prolonged periods of low returns for investors.
