U.S. Middle Market Shows Continued Strength in Earnings and Revenue Growth
Middle-market private companies in the Golub Capital Altman Index (GCAI) demonstrated robust financial health in the first two months of the fourth quarter of 2024, with earnings growing by 9% and revenue increasing by 6%. This marks the ninth consecutive quarter of strong performance, underscoring the resilience of the U.S. middle market amidst shifting economic conditions.
Encouraging Consumer Sector Growth
Lawrence E. Golub, CEO of Golub Capital, highlighted the standout performance of the consumer sector, which posted its highest revenue and earnings growth rates of 2024 in the fourth quarter. “The solid performance of Consumer companies in our sample paints an encouraging picture of the U.S. consumer,” said Golub. He attributed this growth to a mix of economic tailwinds, including low unemployment, healthy wage growth, lower energy prices, and declining interest rates.
Golub suggested that the ongoing strength of the U.S. consumer might necessitate a more measured pace of interest rate reductions. “Looking forward, the health of the U.S. consumer may call for a slower pace of interest rate cuts than expected: one closer to the path implied by current Fed futures market prices than to the most recent Fed dot plot,” he noted.
Broad-Based Economic Strength
Dr. Edward I. Altman, a renowned credit expert and co-creator of the GCAI, emphasized the consistency of revenue and earnings growth across various sectors. “The consistency of revenue and earnings growth rates across sectors points to broad-based economic strength in Q4,” Altman stated. He also noted that profit margins expanded for the sixth consecutive quarter, with aggregate earnings growth significantly outpacing revenue growth.
Altman highlighted the potential for even stronger performance in the consumer sector, given that the GCAI data does not fully capture the robust holiday season spending in December. However, he cautioned investors about the importance of performance dispersion within sectors. “Strong median performance does not tell the whole story, and skill at avoiding problem credits and managing them effectively when they occur are critical differentiators of long-term investor performance,” he advised.
The Golub Capital Altman Index: A Key Economic Indicator
The Golub Capital Altman Index is a pioneering tool for measuring the financial health of middle-market companies. It tracks the median revenue and earnings growth of approximately 110–150 private U.S. companies within Golub Capital’s loan portfolio. As the first and longest-running index based on actual revenue and earnings data, it has proven to be a reliable predictor of public company performance and broader economic trends, including quarterly GDP growth.
The GCAI provides insights into the performance of various industries while maintaining the confidentiality of company-specific information. Its methodology and scope make it a valuable resource for understanding the dynamics of the middle market, which plays a critical role in U.S. private sector employment and economic growth.
Industry Breakdown and Comparisons
The GCAI includes companies from a diverse range of industries but has limited exposure to sectors such as Financials, Utilities, Energy, and Materials. This focus allows for comparisons with adjusted versions of major market indexes like the S&P 500 and S&P SmallCap 600. By excluding certain sectors, the index provides a clearer picture of the underlying performance of middle-market companies relative to public market peers.
Key Insights from the Report
- Consumer Sector Resilience
The consumer sector outperformed expectations, benefiting from macroeconomic tailwinds such as rising wages and declining energy costs. This strength reflects the broader resilience of U.S. households, even amidst economic uncertainties. - Profit Margin Expansion
For the sixth consecutive quarter, profit margins expanded as earnings growth outpaced revenue growth. This trend highlights the operational efficiency of middle-market companies and their ability to manage costs effectively. - Sector Consistency
Revenue and earnings growth remained consistent across sectors, signaling broad-based economic health. This stability suggests that middle-market companies are well-positioned to navigate potential challenges in the broader economy. - Performance Dispersion
Despite strong overall results, performance varied within sectors and portfolios. This underscores the importance of skilled credit management and portfolio diversification for investors.
About Golub Capital
Golub Capital is a leading direct lender and private credit manager, specializing in financing solutions for companies backed by private equity sponsors. The firm’s expertise spans sponsor finance, broadly syndicated loans, and credit opportunities, making it a trusted partner for private equity sponsors and investors. With over $70 billion in capital under management and a global presence, Golub Capital is committed to delivering reliable and innovative financial solutions.
About Dr. Edward I. Altman
Dr. Altman is a distinguished authority on credit markets and the co-creator of the GCAI. He serves as the Max L. Heine Professor of Finance, Emeritus, at NYU Stern School of Business and is an advisor to several central banks. Dr. Altman has published extensively on credit and debt markets, earning recognition as a thought leader in the field. His expertise has been instrumental in the development and success of the GCAI.
Implications for Investors
The latest GCAI results offer valuable insights for investors seeking to understand the health of the middle market and its implications for broader economic trends. The strong performance of the consumer sector, coupled with consistent growth across other industries, suggests a resilient economic environment heading into 2025. However, the emphasis on performance dispersion highlights the need for careful credit management and a nuanced approach to portfolio construction.
