U.S. Stock Indices Decline Following Moody’s Credit Downgrade

The S&P 500 Index ($SPX) (SPY) is down -0.36%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.09%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.45%. June E-mini S&P futures (ESM25) have decreased by -0.38%, while June E-mini Nasdaq futures (NQM25) are down -0.52%.

Today, U.S. stock indexes are trading lower, with Treasury note yields rising. This shift follows Moody’s Ratings decision to downgrade the U.S. government’s top credit rating. Late last Friday, Moody’s downgraded the U.S. from Aaa to Aa1, citing concerns over a growing budget deficit. The dollar fell to a one-week low, and the one-year T-note yield reached a five-week high of 4.562%. This decrease in the dollar is linked to investors moving away from dollar-denominated assets. However, stocks saw some recovery from their lows as investors engaged in dip buying.

Credit Downgrade Context and Its Impact

The U.S. had previously lost its top credit rating from S&P in 2011 and from Fitch in 2023. With Friday’s downgrade from Moody’s, it aligns with its competitors. The current outstanding Treasury securities rose dramatically from $4.5 trillion in 2007 to nearly $30 trillion, reflecting heightened government borrowing during the pandemic and the ongoing federal budget deficit issue. Sifma, a bond market trading group, reported a surge in annual gross sales of government debt from $362 billion in 2007 to $2.6 trillion last year. Furthermore, the ratio of total U.S. public debt to GDP increased from about 35% in 2007 to 100% today, according to the Congressional Budget Office.

Economic Indicators and Fed Comments

Recent U.S. economic news has been unfavorable for stocks, highlighted by a -1.0% decline in April’s leading economic indicators, the largest drop in over two years. Atlanta Fed President Raphael Bostic expressed concerns about inflation, suggesting only one potential Federal Reserve rate cut this year, emphasizing that Moody’s downgrade could negatively affect borrowing conditions for U.S. companies and households.

Additional comments from Federal Reserve officials indicate a cautious approach to any changes in interest rates. New York Fed President John Williams mentioned the need for time to assess new data, with possible relevance to the previous administration’s tariffs and overall economic outlook. Fed Vice Chair Jeffrey Jefferson believes the current monetary policy is functioning well and suggests patience in evaluating the evolving economic impact from government policies.

Upcoming Market Focus

This week, market attention will shift toward tariff news and potential new trade agreements. Analysts expect initial unemployment claims to rise by 1,000 to 230,000. The May S&P manufacturing PMI is forecast to fall by -0.3 to 49.9. Additionally, April existing home sales are anticipated to increase by +2.0% month-over-month to 4.10 million, while new home sales are predicted to decrease by -4.7% to 690,000.

Currently, the markets are pricing in an 8% chance for a -25 basis point rate cut at the upcoming FOMC meeting on June 17-18.

Quarterly Earnings Overview

The Q1 earnings reporting season is nearing completion, with over 85% of S&P 500 companies releasing results. About 77% of these companies have exceeded estimates, marking the highest success rate since Q2 2024. Earnings growth for Q1 is reported at +13.1%, surpassing the previous expectation of +6.6%. Projections for full-year corporate profits in the S&P 500 for 2025 have adjusted down to +9.4% from +12.5% early in January.

International Market Performance

International stock markets today are mostly trending downward. The Euro Stoxx 50 has decreased by -0.26%, while China’s Shanghai Composite remained unchanged. Japan’s Nikkei 225 closed down -0.68%.

Interest Rate Movements

June 10-year T-notes (ZNM25) are down -8 ticks, with the 10-year T-note yield increasing by +1.6 basis points to 4.493%. The T-note market is under pressure following Moody’s downgrade, which could drive investors to demand higher yields for Treasuries. T-notes are also affected by recent declines in European government bonds. Comments from Atlanta Fed President Bostic about rising inflation expectations have added pressure to T-notes.

European government bond yields are rising today, with the 10-year German bund yield up by +0.2 basis points to 2.592%. The 10-year UK gilt yield reached a five-week high of 4.726%, rising by +1.7 basis points to 4.666%.

ECB President Christine Lagarde remarked that the dollar’s recent decline against the euro underscores uncertainty and lack of confidence in U.S. policies among certain financial market segments. ECB Governing Council member Muller suggested that while further easing of monetary policy might be warranted, significant rate cuts are not evidently justified right now. Market swaps are currently indicating a 91% probability for a -25 basis point rate cut by the ECB during the June 5 policy meeting.

Key U.S. Stock Movers

Weakness among the Magnificent Seven stocks is impacting the broader market, with Tesla (TSLA) down more than -3% and Apple (AAPL) declining over -2%. Other notable declines include Alphabet (GOOGL) down -0.93% and Meta Platforms (META) down -0.37%. Additionally, Amazon.com (AMZN) and Nvidia (NVDA) are both down by -0.30% and -0.27%, respectively.

Chip stocks are experiencing a downturn today. Advanced Micro Devices (AMD), Marvell Technology (MRVL), ARM Holdings Plc (ARM), and ON Semiconductor (ON) have all diminished by over -2%. The same goes for Applied Materials (AMAT), Intel (INTC), Microchip Technology (MCHP), NXP Semiconductors NV (NXPI), Lam Research (LRCX), and GlobalFoundries (GFS).

Reddit (RDDT) is down more than -4% following Wells Fargo Securities’ downgrade to equal weight from overweight. NuScale Power (SMR) has slipped more than -3% due to indications of insider selling, highlighted by an SEC filing showing CEO Hopkins sold $623,375 worth of shares last Thursday. Shake Shack (SHAK) is down more than -2%, as TD Cowen downgraded the stock to hold from buy, citing overvaluation in a tough consumer spending environment.

Netflix (NFLX) is down more than -1% after JPMorgan Chase downgraded it to neutral from overweight. Conversely, gold mining stocks are benefiting today, with COMEX gold prices increasing by over +1%. Anglogold Ashanti Plc (AU) and Gold Fields Ltd (GFI) have both risen by more than +1%.

Health insurance stocks, previously underperformers, are rebounding. UnitedHealth Group (UNH) leads gainers in the S&P 500 and Dow Jones Industrials with a surge of more than +3%. Humana (HUM) is also up by more than +2%.

Sight (RXST) has jumped more than +11% after Wells Fargo Securities upgraded it to overweight from equal weight, setting a price target of $25. Additionally, Take-Two Interactive Software (TTWO) is up by more than +3% after Morgan Stanley raised its price target from $210 to $265.

Solventum (SOLV) rose more than +1% following an upgrade by Piper Sandler to overweight from neutral, with a price target of $87. AutoZone (AZO) is also up more than +1% after TD Cowen increased its price target to $4,300 from $3,900.

Upcoming Earnings Reports

Earnings Reports (5/19/2025): 8×8 Inc (EGHT), Agilysys Inc (AGYS), Aldeyra Therapeutics Inc (ALDX), Gencor Industries Inc (GENC), Safe Bulkers Inc (SB), Target Hospitality Corp (TH), Transcat Inc (TRNS).

On the date of publication, Rich Asplund did not have any positions in the securities mentioned in this article. All information and data herein are for informational purposes only. For more information, please view the Barchart Disclosure Policy here.

The views and opinions expressed in this report belong to the author and do not necessarily reflect those of Nasdaq, Inc.