Divergence in Credit Conditions: Index-Level Resilience vs Typical-Firm Strain

Divergence in Credit Conditions: Index-Level Resilience vs Typical-Firm Strain

02/02/2026 10:15 AM

Markets opened 2026 with risk appetite intact, and early performance patterns suggested leadership may be broadening beyond the mega-caps (January: S&P 500 +1.4% vs Russell 2000 +5.3%). Risk assets continued to reward scale, liquidity, and perceived cash flow durability. Our default probability forecasts tell the same story, with a twist: cap-weighted averages (the index view) remain extremely low, while sector medians (the typical-firm view) are elevated. That wedge is another illustration of the themes highlighted in the last three newsletters: exuberance, K-shaped outcomes, and a narrowing definition of winners.

For this month's analysis, we constructed an equity market cap-weighted average cumulative default probability for the largest 3000 companies in the United States (Figure 1). Unlike the median default probability, which is currently near average from the historical range perspective (Figure 2), the cap-weighted figures are firmly on the low end of the historical spectrum. Considering the greater separation between the size of the largest (and least risky) companies and the rest of the market that was covered in last newsletter, the diverging pictures are not surprising. A more interesting trend emerges when the ratio of median to average is calculated at a GICS sector level (Figure 3).

Figure 1: Market Cap-Weighted Cumulative Default Probability - Top 3000 Companies in the United States

Figure 2: Median Cumulative Default Probability - Top 3000 Companies in the United States

Figure 3: Median / Weighted Average 1Yr PD Ratio by Sector

Median / cap-weighted average is a "representativeness" metric: it measures how far the index-like, market-cap-weighted PD is from the typical firm's PD. When the ratio is high, the cap-weighted average is being pulled down by large, low-PD constituents (and/or the negative size-risk relationship steepens). Comparing December 2019 with January 2026 shows that market-cap-weighted PD has become less representative of the typical firm's PD. In other words, a handful of large firms doing particularly well can produce a low-risk "index" view even when the median issuer remains under pressure. This gap is especially pronounced (and has widened) in health care, information technology, and communication services. Three of the Magnificent Seven ("Mag7") stocks are classified as Information Technology (NVDA, AAPL, MSFT) and two as Communication Services (GOOGL, META), creating significant sector concentration in low-PD firms. As of this snapshot, all Mag7 constituents have sub-10bps 1yr PDs. At the same time, these sectors have a long tail of higher risk companies. We highlighted the Communication Services sector in the October 2025 newsletter. The list of riskiest technology companies is shown in Table 1.

Table 1: Information Technology - Top 10 Riskiest Companies (as of January 16, 2026)

The technology sector has been especially exposed to product substitution, pricing pressure, and refinancing costs, as reflected in the top 10 list. Technology obsolescence and SaaS commoditization are other prominent themes across the companies in this list.

Further sector-level details and trends can be found in the tables that follow. Table 2 benchmarks each GICS sector against its long-run median using 1-year KDP measure. The Median column represents the median value of the daily median KDP values going back to 1999. The columns that follow show historical snapshots of the median 1-year KDP, and the last two columns quantify how far the latest snapshot sits above its historical median and where it ranks in percentile terms.

Table 2: Median 1-year Default Probability (Top 3000 Firms in the United States)

Table 3 displays market cap-weighted averages of 1-year KDPs (instead of medians).

Table 3: Market Cap-Weighted Average 1-year Default Probability (Top 3000 Firms in the United States)

Key takeaway: Index-level risk is being suppressed by size concentration - the market portfolio can look benign even while the median issuer remains under pressure.

Why KRIS KDP matters now. Market prices can remain calm even as underlying risk concentrates, making model-based, issuer-level signals essential. KRIS default probabilities provide daily, issuer-level signals that make the bifurcation visible - pinpointing names where refinancing pressure, equity-vol shocks, or weakening coverage are rising even when spreads don't budge. Used alongside market spreads and fundamentals, KDPs help identify issues not yet priced, providing actionable early warnings.

Contemporaneous Credit Conditions
The Kamakura Troubled Company Index® closed the month of January 2026 at 7.32%, up 0.04% from the prior month. The index measures the percentage of 42,236 public firms worldwide with an annualized one-month default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the end of January, 7.32% of firms in the coverage universe had a one-month default probability above 1%. Within this group, 5.54% of firms had default probabilities between 1% and 5%, 0.97% between 5% and 10%, 0.40% between 10% and 20%, and 0.41% above 20%. For the month, the percentage of companies with a short-term default probability over 1% ranged from a low of 6.96% on January 22nd to a high of 7.52% on January 5th.

Figure 4: Troubled Company Index®, January 30th, 2026

At the end of January, the riskiest 1% of rated public firms within the coverage universe as measured by 1-month default probability included ten companies in the U.S. , one in Canada and one in the UK. TEADS HOLDING CO (NASDAQ: TEAD) is the riskiest rated firm in our universe, with a 1-month KDP of 31.80%-up 4.29% over the past month.

Table 4: Riskiest Rated Companies Based on 1-month KDP, January 30th, 2026

The Expected Cumulative Default Rate reports the expected cumulative probability of default for rated public firms worldwide across multiple horizons. As of January 30th, 2026, the one-year expected default rate is 0.45%, even with the prior month, with the 10-year rate up 0.06% at 6.87%.

Figure 5: Expected Cumulative Default Rates, January 30th, 2026

About the Troubled Company Index
The Kamakura Troubled Company Index^® measures the percentage of ~42,500 public firms in 76 countries that have an annualized one-month default risk of over one percent. The average index value since January 1990 is 13.94%. Since July 2022, the index has used the annualized one-month default probability produced by the KRIS version 7.0 Jarrow-Chava reduced form default probability model, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macroeconomic factors.

The KRIS version 7.0 models were developed using a data base of more than 4 million observations and more than 4,000 corporate failures. A complete technical guide, including full model test results and key parameters, is provided to subscribers. Available models include the non-public-firm default model, the U.S. bank model, and the sovereign model.

The version 7.0 model was estimated over the period from 1990, through the Great Recession and ending in February 2022. The 76 countries currently covered by the index are Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Kuwait, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Nigeria, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Taiwan, Thailand, Turkey, the United Arab Emirates, Uganda, the UK, the U.S., Vietnam and Zimbabwe.

About SAS
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Editorial contacts:

• Stas Melnikov - [email protected]
• Eric Penanhoat - [email protected]