Does the “One Big Beautiful Bill” = big beautiful profits?

Steve Boothe, CFA® Head of Global Investment Grade
Thomas Heidenberger, CFA® Fixed Income Portfolio Specialist
 

Key Insights

• The cost of the One Big Beautiful Bill Act (OBBBA) has been the primary focus of markets’ attention, but it’s important to not overlook its potential implications for corporate profits.
• Using the Kalecki‑Levy profits identity framework, our analysis suggests that the OBBBA should provide an uplift in corporate profitability.
• The findings provide support for long‑term overweight positions in higher‑quality credit sectors such as investment‑grade and BB rated high yield issuers.

The passage of the One Big Beautiful Bill Act (OBBBA) marks a meaningful shift in U.S. fiscal policy, away from pandemic‑era income and consumption support and toward long‑term capital formation. While much of the financial markets community remains fixated on the “cost” of the bill to the federal budget, the more relevant question that investors need to ask is: What are the implications for forward investment and corporate profits?

To answer this, we apply the Kalecki‑Levy profits identity,1 a macroeconomic framework that links fiscal flows to private sector profitability. Unlike traditional earnings models based on bottom‑up forecasting of revenues and margins, the Kalecki‑Levy approach highlights how profits are shaped by sectoral financial balances across households, government, and the foreign sector. In this context, the OBBBA’s deficit‑expanding, investment‑oriented provisions are likely to deliver a durable boost to corporate profits, with key implications for credit markets.

The Kalecki‑Levy profits identity

At its core, the Kalecki‑Levy profits equation is a macroeconomic identity derived from the national accounting relationship between savings and investment:

This identity framework asserts that corporate profits increase when investment rises and/or when the public sector maintains a deficit. This orientation shifts investor understanding of profitability away from firm‑specific factors and toward macroeconomic flows.

We begin with the basic macro identity:

Then disaggregate the economy into four sectors: households, businesses, government, and foreign:

Solving for business savings (i.e., corporate profits) gives us:

This macro‑to‑micro link forms the analytical foundation for our profit outlook.

Evaluating the OBBBA through the Kalecki‑Levy lens

The OBBBA expands fiscal spending and reduces tax liabilities for capital investment, directly supporting corporate profits under the Kalecki‑Levy identity. The OBBBA encourages private sector investment through full expensing of capital expenditures in equipment, structures, and research and development (R&D). 

The technology and health care sectors are likely to benefit from upfront and retroactive deductibility of R&D expensing. The energy and industrials sectors should benefit from 100% first year deprecation expensing. Active management is critical, however, for identifying sector‑ and company‑specific winners of the OBBBA.

Credit market implications

The OBBBA’s profit‑supportive fiscal dynamics are positive for corporate credit quality. The mirror image of higher government deficits is surpluses that contribute to improving the net financial position of the private sector. Additional policy support that incents capital investment creates an additional uplift to overall profitability in key sectors, supporting credit quality and narrower credit spreads. Large‑cap public corporates are likely to benefit the most. As such, we see potential for “tighter for longer” credit spreads, particularly for investment‑grade and higher‑quality high yield rated issuers.

Fiscal policy to support higher‑quality credit

The Kalecki‑Levy profits identity offers a robust framework for understanding how fiscal policy transmits into corporate profits. The OBBBA, by expanding fiscal deficits via policies that support capital spending, provides an uplift in corporate profitability. For investors, utilizing this framework supports the case for long‑term overweights to U.S. high‑quality credit sectors such as investment‑grade and BB rated high yield issuers. But it’s important to keep in mind that detailed analysis of individual corporate credits is still essential even as the fiscal expansion broadly supports higher‑quality credit.
 

The OBBBA’s profit‑supportive fiscal dynamics are positive for corporate credit quality.

– Steve Boothe, CFA®
Head of Global Investment Grade

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