Markets React to US Credit Rating Downgrade Amid Mixed Signals

The S&P 500 Index ($SPX) has decreased by 0.11%, while the Dow Jones Industrials Index ($DOWI) has risen by 0.19%. The Nasdaq 100 Index ($IUXX) is down by 0.31% today.

Stock indexes are showing mixed performance today, with T-note yields rising following Moody’s Ratings’ decision to downgrade the US government’s credit rating. Late last Friday, Moody’s downgraded the rating from Aaa to Aa1, citing a growing budget deficit and fiscal concerns. As a result, the dollar has fallen to a 1-week low, and the 1-year T-note yield has surged to a 5-week high of 4.562%, as investors shed dollar assets in response to the news.

This downgrade marks a significant development, as the US previously lost its top credit rating from S&P in 2011 and from Fitch in 2023. With Moody’s catching up, the downgrade is drawing attention to the country’s fiscal health.

The outstanding amount of Treasury securities has skyrocketed from $4.5 trillion in 2007 to nearly $30 trillion today, reflecting significant government borrowing during the pandemic and an ongoing inability to control the federal budget deficit. According to SIFMA, a bond market trading group, annual gross sales of government debt increased from $362 billion in 2007 to $2.6 trillion last year. Moreover, the ratio of total US public debt to the size of the economy has surged from approximately 35% in 2007 to 100% today, according to the Congressional Budget Office.

Comments from Atlanta Fed President Bostic were bearish for stocks and bonds. He expressed concerns about inflation, stating, “Given the trajectory of our two mandates, I worry a lot about the inflation side, and mainly because we’re seeing expectations move in a troublesome way.” Bostic indicated that he is leaning toward just one Fed rate cut this year. He added that Moody’s downgrade could negatively impact US companies and households seeking to borrow.

This week, the markets will keep a close watch on any news regarding tariffs or new trade deals. On Thursday, initial unemployment claims are anticipated to rise by 1,000 to 230,000. Additionally, the May S&P manufacturing PMI is expected to dip by 0.3 to 49.9. It is also projected that April existing home sales will increase by 2.0% month-over-month to 4.1 million units, while April new home sales are expected to decline by 4.7% month-over-month to 690,000.

Currently, there is a 9% chance being priced in for a 25 basis point rate cut at the next Federal Open Market Committee meeting scheduled for June 17-18.

The Q1 earnings reporting season is nearing its conclusion. So far, over 85% of S&P 500 companies have reported quarterly results, with 77% surpassing estimates, marking the highest percentage since Q2 2024. Earnings growth for Q1 stands at 13.1%, significantly higher than the 6.6% expected prior to the season. Looking ahead, full-year 2025 corporate profits for the S&P 500 are projected to grow by 9.4%, a decrease from the initial forecast of 12.5% made in early January.

Internationally, stock markets are mostly lower today. The Euro Stoxx 50 is down 0.74%, while China’s Shanghai Composite closed unchanged. Japan’s Nikkei 225 closed down 0.68%.

Interest Rates

The June 10-year T-notes (ZNM25) are down 20 ticks today, with the 10-year T-note yield increasing by 6.0 basis points to reach 4.537%. The yield jumped to a 5-week high of 4.562% after Moody’s downgrade, leading to potential higher yields for investors holding Treasuries. T-notes are also under pressure from a negative carryover due to a drop in European government bonds. Furthermore, Atlanta Fed President Bostic’s comments on rising inflation expectations added weight to T-notes.

European government bond yields are also on the rise today. The 10-year German bund yield is up 3.5 basis points at 2.625%, while the 10-year UK gilt yield reached a 5-week high of 4.726%, increasing by 4.5 basis points to 4.694%.

ECB President Lagarde noted that the dollar’s recent decline against the euro reflects “uncertainty and loss of confidence in US policies among certain segments of the financial markets.”

Swaps are currently pricing in a 91% chance for a 25 basis point rate cut by the ECB at the upcoming meeting on June 5.

US Stock Movers

The broader market is being weighed down by the underperformance of the so-called “Magnificent Seven” stocks. Tesla (TSLA) is down over 3%, while Apple (AAPL) has decreased more than 2%. Other notable declines include Nvidia (NVDA) down 0.87%, and Meta Platforms (META) down 0.50%. Additionally, Alphabet (GOOGL) is down 0.35%, and Amazon.com (AMZN) is experiencing a 0.15% decline.

Chip stocks are facing downward momentum today, with Marvell Technology (MRVL) leading the losses at more than 4%, followed by ARM Holdings Plc (ARM) down over 3%. Other chip makers, including ON Semiconductor (ON), Intel (INTC), Microchip Technology (MCHP), NXP Semiconductors NV (NXPI), Advanced Micro Devices (AMD), Micron Technology (MU), and GlobalFoundries (GFS), are also down more than 2%.

Reddit (RDDT) has fallen over 4% after Wells Fargo Securities downgraded the stock from overweight to equal weight.

NuScale Power (SMR) is down more than 3% following signs of insider selling, with CEO Hopkins selling $623,375 worth of shares last Thursday.

Shake Shack (SHAK) is down more than 2% after TD Cowen downgraded the stock to hold from buy, citing high valuation concerns amid a tough consumer spending environment. Netflix (NFLX) is down by over 1% after JPMorgan Chase downgraded the stock to neutral from overweight.

Gold mining stocks are performing well today, with COMEX gold prices rising by over 1%. Companies such as Anglogold Ashanti Plc (AU) and Gold Fields Ltd (GFI) are up more than 1%.

Health insurance stocks, previously facing setbacks, are rebounding. UnitedHealth Group (UNH) is up more than 4%, leading gainers in the S&P 500 and Dow Jones Industrials. Humana (HUM) is also up more than 1%.

RxSight (RXST) has surged more than 16% after Wells Fargo Securities upgraded the stock to overweight from equal weight, setting a price target of $25. Take-Two Interactive Software (TTWO) is up over 2% as Morgan Stanley increased its price target from $210 to $265.

Earnings Reports (5/19/2025)

Companies reporting include 8×8 Inc (EGHT), Agilysys Inc (AGYS), Aldeyra Therapeutics Inc (ALDX), Gencor Industries Inc (GENC), Safe Bulkers Inc (SB), Target Hospitality Corp (TH), and Transcat Inc (TRNS).

On the date of publication, Rich Asplund did not hold any positions in the securities mentioned in this article. All information is for informational purposes only. For further details, please refer to the Barchart Disclosure Policy.

The views expressed herein are solely those of the author and do not necessarily reflect the opinions of Nasdaq, Inc.