Traders on the floor of the New York Stock Exchange. Brendan McDermid | Reuters

This decade's surge in corporate debt could pressure stocks in 2020 as corporate earnings slow to a crawl, hurting the ability of companies to timely repay that debt and keep the solid credit ratings that allow them to borrow so cheaply, according to a theory laid out by UBS strategist Francois Trahan. Many Wall Street strategists share the concern about the ballooning corporate debt load but few sound as worried as Trahan. Most put it as a footnote in their 2020 outlook reports. The issue is, as Trahan points out, is that credit issues usually don't matter to the equity market unless the economy is in a slowing or contracting phase. In a Tuesday note, Trahan said that U.S. corporate debt has surged by 50% since 2009 and now stands at nearly $10 trillion. Such a jump in corporate debt would be more worrisome had it not been for the steady economic recovery and steep drop in yields, he said. Since 2010, yields on Baa-rated corporate bonds have fallen to around 3.9% from more than 6.3%.

However, the impact could be felt as early as next year as slowing economic activity and a potential fall in corporate earnings lead to debt downgrades for some of the biggest companies in the world, including Amazon, 3M and Walmart. Debt downgrades could mean these companies would have to roll over their debt — half of which matures in the next five-to-six years — at a much higher rate, putting pressure on their shares and the broader stock market, he proposes. "Leaving aside our biases for markets and the economy, LEIs of credit markets point to a deterioration of ratings throughout 2020," Trahan said. Trahan pointed to the Institute for Supply Management's new orders index as a key leading indicator, noting it has been in a downtrend for about six months. He also noted the index has been below 50 over the past four months. A reading below 50 signals contraction. This decline in new orders could foreshadow a drop in the S&P 500's average credit rating, which has risen on a year-over-year basis. Trahan notes that measure of economic activity leads the stock benchmark's average credit rating by six months. "Moreover, interest rates argue that this decline in the ISM is not likely over, suggesting that this risk could possibly last throughout all of 2020," the strategist said. Rates fell throughout 2019 as the Federal Reserve pivoted away from the hiking cycle it set off during the previous year. The central bank cut the U.S. overnight rate three times this year after four rate hikes in 2018. All of this takes place at a time when earnings expectations are just above flat. However, if those expectations decline and turn negative, it could amplify debt downgrades for S&P 500 companies and in turn, hit their stock prices, he proposes.

Amazon, 3M and Walmart at risk