Blog — August 15, 2025
Regional and Sector Risk Insights: What PD Models Reveal About U.S. Credit Health
By Arsene Lui
Topline Summary
This blog explores the evolution of credit risk across U.S. regions and industries using two complementary models: the PD (probability of default) Model Market Signals and the RiskGauge Model. The analysis highlights key trends in the PD between July 2024 and July 2025, revealing regional differences, sector-specific vulnerabilities, and the contrasting insights provided by market-based and fundamentals-based risk measures.
Overall, the regional rank order emerged in terms of credit risk: West > Northeast > South > Midwest. When considering the deterioration in credit risk over the past year, the Energy and Consumer Product sectors were hit hardest.
Two Distinct Views of Credit Risk
To assess the PD in today’s complex credit environment, two credit risk models were applied and analyzed separately:
- PD Model Market Signals provides a point-in-time view of credit risk and early warning signals of potential default based on the equity market information. It is a structural model based on the Merton approach. Additional modifications have been made to account for the size, country, and industry factors.
- RiskGauge Model generates a comprehensive view of credit risk by incorporating financial risk (e.g., financial ratios), business risk (e.g., country and industry risk), and market-driven factors (e.g., equity market information) to assess the probability of default (PD) of a counterparty.
Sample Scope
This analysis focuses on U.S. companies for which both Market Signal PD and RiskGauge PD were available and valid (i.e., not defaulted) as of July 31, 2024 and July 31, 2025. This allowed for a consistent, apples-to-apples comparison over the one-year period.
Monthly PD by Region & Model
Figure 1
Source: S&P Global Market Intelligence. As of August 5, 2025.
Figure 2
Source: S&P Global Market Intelligence. As of August 5, 2025.
Regional Trends in PD: Shifts Over Time
Across both models, a consistent regional rank order emerged in terms of credit risk: West > Northeast > South > Midwest. Companies in the western U.S. exhibited the highest average PDs, suggesting elevated risk factors unique to that region.
Interestingly, RiskGauge PDs were notably higher than Market Signal PDs in the West, indicating heightened financial or business risk factors that may not be immediately reflected in market sentiment. In contrast, the South showed the largest year-over-year increase in PD, highlighting a broad-based deterioration in credit quality.
The West, despite having the highest PDs, experienced the smallest percentage increase, suggesting relative stability in an otherwise risk-heavy environment. In the Northeast[AL1] , the Market Signal PD rose much faster than the RiskGauge PD, hinting at market-driven concerns possibly disconnected from the underlying financial fundamentals.
Table 1: Summary on regional PD trends
PD Change by Region, Industry Sector & Model
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
Figure 8
Figure 9
Figure 10
Industry Sector Trends: Who's at Risk?
A deeper look into the intersection of region, industry, and model reveals some clear sector-level vulnerabilities. The industries with the most pronounced increases in PD over the year were:
- Energy
- Non-Durable Consumer Products
- Durable Consumer Products
The Energy sector was hit hardest, driven by a combination of geopolitical tensions, supply chain disruptions, regulatory changes, and ongoing market volatility. These challenges have led to sharp shifts in perceived risk and actual financial performance across many energy companies.
For both durable and non-durable consumer products, the increased risk appears tied to intense competition, fragile supply chains, and stricter regulatory requirements. Additionally, economic uncertainty has weighed heavily on consumer spending, further straining margins and profitability.
Table 2: Top 5 industries with the largest YoY increase in PD
Conclusion: Why Using Both Models Matters
Credit risk is multifaceted, and a single model rarely tells the whole story. The PD Model Market Signals provides a real-time pulse on market sentiment, while the RiskGauge Model grounds the analysis in business fundamentals and financial strength, in addition to the market sentiment.
Together, they offer a powerful framework for identifying early warning signs of default risk and understanding where risk is accelerating — whether due to market perceptions or structural weaknesses. For investors, lenders, and risk managers alike, using both perspectives enables more informed and timely decisions.