US corporate earnings have outpaced forecasts in the second quarter, but signs of a slowing economy are growing, prompting Nuveen chief investment officer Saira Malik to call for a pivot towards high-quality income assets such as preferred securities.
“With 90% (450 companies) having released their quarterly financial results as of 8 Aug, the blended earnings growth rate stood at +11.8% y-o-y,” she says. The figure is well above the +4.9% consensus estimate at the end of June, which had been revised down from +9.3% in early April. If maintained, it would mark the third consecutive quarter of double-digit earnings growth.
This strong performance comes despite weak sentiment and volatility linked to trade tensions. However, recent economic data suggest that underlying momentum is weakening. “The ISM Services PMI for July showed the service sector of the economy barely expansionary at 50.1,” she says, noting that the manufacturing gauge has been below the 50 mark in 31 of the past 33 months.
Labour market indicators have also turned softer. “July’s jobs report included shocking downward revisions to nonfarm payrolls for May and June,” she says. Malik adds that these data points “may be the clearest signals yet of a decelerating economy”. While weaker figures could lead the US Federal Reserve to cut rates sooner, she warns that the lowered rates may turn out to be “too little, too late to fend off an outright recession”.
In this context, Malik recommends that investors concerned about narrow equity market leadership, stretched valuations and the prospect of recession may want to consider diversifying their portfolios into asset classes with a history of resilience during slowdowns and the potential to benefit from falling rates.
She sees preferred securities as one of the most attractive options. “Preferreds are issued primarily by banks, where fundamentals are sound,” she says. Many institutions passed 2025 stress tests in both the US and Europe and carry investment-grade ratings at the senior level, with most preferreds rated BBB.
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Ytd, performance has been positive across the market. “Contingent capital securities (CoCos) are up +6.6%, followed by $1000 par securities at +4.6% and US$25 par securities at +2.5%,” she says. She further adds that while spreads across fixed income are tight, preferreds remain above historic lows.
Within the market, Malik says that “we favour US$1000 par and CoCo securities” because of their income levels, lower duration and better liquidity compared with US$25 par preferreds. Over the past three years, US$1000 par preferreds have delivered +7.4% annualised returns, significantly outperforming US$25 par securities at +1.6%.
She also believes that active management is the best way to approach this asset class. Malik says that “some preferreds offer tax efficiency, as income may be considered qualified dividend income (QDI) and is taxed at 20% rather than at higher ordinary income tax rates.” Active managers, she says, can target both tax efficiency and larger allocations to the US$1000 par segment.
While Nuveen expects interest rates to trend lower over time, the adjustment is likely to be uneven. Malik says that “the path to lower rates may be volatile”, making short-duration, higher-yielding fixed income assets attractive as a buffer. Preferred securities, given their structure and credit profile, can play a key role in balancing income generation with capital preservation.
