US Market Recovers Slightly Despite Credit Rating Downgrade

The S&P 500 Index ($SPX) (SPY) closed up +0.09% on Monday, while the Dow Jones Industrials Index ($DOWI) (DIA) rose by +0.32%. The Nasdaq 100 Index ($IUXX) (QQQ) also increased by +0.09%. However, June E-mini S&P futures (ESM25) dipped -0.01%, and June E-mini Nasdaq futures (NQM25) fell -0.05%.

Market Recovery Following Early Losses

On Monday, stock indexes rebounded from early losses due to strong dip buying by investors and encouraging comments from Treasury Secretary Bessent, who emphasized the government’s commitment to reducing spending and fostering economic growth. Initially, stocks opened lower after Moody’s Ratings downgraded the US credit rating from Aaa to Aa1 last Friday, citing increased budget deficits and ongoing fiscal concerns.

Impact of Credit Rating Downgrade

This downgrade marked Moody’s alignment with other rating agencies that downgraded the US in recent years; S&P did so in 2011, and Fitch followed suit in 2023. The total outstanding Treasury securities have surged from $4.5 trillion in 2007 to nearly $30 trillion today, reflecting rampant government borrowing during the pandemic and the failure to reduce the federal budget deficit. Sifma, a bond trading group, reported that annual gross sales of government debt soared from $362 billion in 2007 to $2.6 trillion last year. Additionally, the ratio of total US public debt to GDP rose from approximately 35% in 2007 to 100% today, as per the Congressional Budget Office.

Weak Economic Indicators

Monday’s economic news was discouraging for stocks, with April’s leading economic indicators falling -1.0% month-over-month, marking the most substantial drop in over two years. Comments from Atlanta Fed President Bostic added to the bearish sentiment, indicating concerns over rising inflation expectations. Bostic stated he anticipates only one Fed rate cut this year and highlighted that Moody’s downgrade could negatively affect US companies and households seeking loans.

Federal Reserve’s Stance on Interest Rates

Other Fed officials expressed a cautious approach, suggesting they would wait for additional data before making decisions regarding interest rates. New York Fed President Williams mentioned that the Fed could take time to evaluate new information and may require months to fully understand the impacts of tariffs and other economic policies. Fed Vice Chair Jefferson described the current policy as “very good” and “moderately restrictive,” reinforcing the need to observe how government policies evolve.

Market Focus This Week

This week, market attention will pivot to potential tariff updates and new trade agreements. Initial unemployment claims are projected to increase by +1,000 to 230,000. Additionally, the May S&P manufacturing PMI is expected to decrease by -0.3 to 49.9, while April’s existing home sales are anticipated to rise by +2.0% month-over-month to 4.1 million. On Friday, April’s new home sales are expected to decline by -4.7% month-over-month to 690,000.

Rate Cut Expectations

The markets are currently pricing in an 8% chance of a -25 basis point rate cut during the next FOMC meeting on June 17-18.

Q1 Earnings Overview

As the Q1 earnings reporting season winds down, over 85% of S&P 500 companies have reported their quarterly results, with 77% exceeding expectations, the highest figure since Q2 of 2024. Earnings growth for Q1 stands at +13.1%, compared to an anticipated +6.6% at the start of the season. Corporate profits for the S&P 500 in 2025 are projected to rise +9.4%, down from the earlier forecast of +12.5% in January.

Global Market Response

International markets closed mostly lower on Monday. The Euro Stoxx 50 declined by -0.01%, while China’s Shanghai Composite remained unchanged. Japan’s Nikkei Stock 225 fell by -0.68%.

Interest Rate Movements

June 10-year T-notes (ZNM25) fell -6 ticks, with the 10-year T-note yield rising +3.5 basis points to 4.463%. Following Moody’s downgrade, the 10-year yield spiked to a 5-week high of 4.562%, signaling potential increased demands for higher yields on Treasuries. Furthermore, Bostic’s remarks about troubling inflation expectations pressured T-notes.

European Government Bond Yields

In Europe, government bond yields were mixed on Monday. The yield on the 10-year German bund fell -0.2 basis points to 2.588%, while the 10-year UK gilt yield climbed to a 5-week high of 4.726%, finishing up +1.5 basis points at 4.665%.

ECB Perspectives

ECB President Lagarde attributed the dollar’s recent decline against the euro to uncertainty and diminishing confidence in US policies among various financial market segments. ECB Governing Council member Muller stated that, while easing monetary policy further may be justified, it is not clear that the ECB should significantly lower rates. Swaps are indicating a 91% probability of a -25 basis point rate cut at the ECB’s June 5 policy meeting.

Notable Stock Movements

On Monday, health insurance stocks rallied, with UnitedHealth Group (UNH) rising over +8% after insider buying activity was reported. Humana (HUM) also gained more than +3%. Pharmaceutical stocks like Moderna (MRNA) and Gilead Sciences (GILD) saw gains of over +6% and +3%, respectively. Gold mining stocks increased alongside a rise in gold prices, with Anglogold Ashanti Plc (AU) and Gold Fields Ltd (GFI) gaining more than +3%.

Sight (RXST) surged over +14% following an upgrade from Wells Fargo Securities to overweight.