US Stock Markets Mixed as Moody’s Downgrades Credit Rating

The S&P 500 Index ($SPX) (SPY) is up +0.14%, the Dow Jones Industrials Index ($DOWI) (DIA) has risen +0.37%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.12%. Additionally, June E-mini S&P futures (ESM25) increased by +0.13%, while June E-mini Nasdaq futures (NQM25) rose +0.05%.

Moody’s Downgrades US Credit Rating

Today, stock indexes reflect a mixed performance as Treasury note yields have increased after Moody’s Ratings downgraded the US government’s credit rating from Aaa to Aa1 late Friday. This decision was influenced by concerns regarding a growing budget deficit. Following the downgrade, the dollar fell to a one-week low, and the one-year T-note yield surged to a five-week high of 4.562%, as investors moved away from dollar assets.

Historical Context on US Credit Ratings

With this downgrade, Moody’s has joined S&P, which downgraded the US in 2011, and Fitch, which did so in 2023. The total outstanding Treasury securities have skyrocketed from $4.5 trillion in 2007 to nearly $30 trillion now, highlighting extensive government borrowing during the pandemic and persistent budget deficits. Sifma reports that annual gross sales of government debt ballooned from $362 billion in 2007 to $2.6 trillion last year. Furthermore, the ratio of total US public debt to the economy’s size has increased from roughly 35% in 2007 to 100% today, according to the Congressional Budget Office.

Economic Indicators and Fed Comments

Today’s US economic news paints a bearish picture, with April leading economic indicators declining by -1.0% month-over-month, marking the most significant drop in over two years.

Comments from Atlanta Fed President Bostic added to the negative sentiment. He expressed concerns about inflation, stating, “I worry a lot about the inflation side, and mainly because we’re seeing expectations move in a troublesome way.” He indicated he favors only one Fed rate cut this year and noted that Moody’s downgrade could adversely affect US businesses and households looking to borrow.

Meanwhile, other Fed officials signaled a cautious approach towards future interest rate decisions. New York Fed President Williams emphasized that the Fed could take its time assessing new data before making decisions and may require months to evaluate the impacts of tariffs and policies from the Trump administration on the economy. Additionally, Fed Vice Chair Jefferson asserted that current policy is effectively restrictive, stating, “Given the level of uncertainty that we’re facing, it is appropriate to wait and see how government policies evolve and their impact.”

Upcoming Economic Data and Market Focus

Markets this week will closely monitor tariff news and potential trade agreements. Weekly initial unemployment claims are projected to rise by 1,000 to 230,000. The May S&P manufacturing PMI is forecasted to decrease by -0.3 to 49.9. On Thursday, it’s expected that April existing home sales will increase by +2.0% month-over-month to 4.10 million, while April new home sales are anticipated to drop by -4.7% month-over-month to 690,000.

The markets currently estimate an 8% chance for a -25 basis point rate cut at the upcoming FOMC meeting scheduled for June 17-18.

Corporate Earnings Overview

The Q1 earnings reporting season is winding down, with over 85% of S&P 500 companies having reported. Notably, 77% have surpassed estimates, the highest rate since Q2 of 2024. Q1 earnings growth is at +13.1%, compared to just +6.6% projected at the beginning of the season. Forecasts for full-year 2025 corporate profits for the S&P 500 show an anticipated rise of +9.4%, down from a previous estimate of +12.5% in early January.

International Markets

Overseas stock markets are generally lower today. The Euro Stoxx 50 is down -0.26%, while China’s Shanghai Composite finished unchanged. Japan’s Nikkei 225 has declined by -0.68%.

Interest Rates Update

June 10-year T-notes (ZNM25) are down -8 ticks, with the 10-year T-note yield rising by +1.6 basis points to 4.493%. This decline is pressured by the recent downgrade from Moody’s. The rise to a five-week high of 4.562% may lead investors to seek higher yields for Treasuries. T-notes are also feeling the effect of declining European government bonds. Bostic’s comments on inflation expectations further contributed to pressure on T-notes.

European government bond yields are trending upward as well. The 10-year German bund yield has increased by +0.2 basis points to 2.592%. The 10-year UK gilt yield has reached a five-week high of 4.726%, rising by +1.7 basis points to 4.666%.

ECB President Lagarde remarked that the recent drop of the dollar against the euro reflects “the uncertainty and loss of confidence in US policies among certain segments of the financial markets.” Additionally, ECB Governing Council member Muller noted that while easing monetary policy further may be warranted, “it’s not obvious that the ECB should significantly lower rates.” Swaps currently indicate a 91% probability of a -25 basis point rate cut by the ECB at the June 5 policy meeting.

US Stock Movers

The broader market is being impacted by the weakness in the “Magnificent Seven” stocks. Tesla (TSLA) is down more than -3%, while Apple (AAPL) is down over -2%. Other declines include Alphabet (GOOGL) down -0.93% and Meta Platforms (META) down -0.37%. Amazon.com (AMZN) also fell by -0.30%, and Nvidia (NVDA) decreased by -0.27%.

Chip stocks are struggling today, with Advanced Micro Devices (AMD), Marvell Technology (MRVL), ARM Holdings Plc (ARM), and ON Semiconductor (ON) each dropping more than -2%. Other chipmakers such as Applied Materials (AMAT), Intel (INTC), Microchip Technology (MCHP), NXP Semiconductors NV (NXPI), Lam Research (LRCX), and GlobalFoundries (GFS) face similar declines.

Reddit (RDDT) has declined more than -4% after Wells Fargo Securities downgraded the stock from overweight to equal weight. NuScale Power (SMR) is down over -3% following insider selling by CEO Hopkins, who sold $623,375 worth of shares last Thursday. Shake Shack (SHAK) is down more than -2% following a downgrade to hold from buy by TD Cowen, citing high valuation amid tough consumer spending conditions.

Netflix (NFLX) has decreased by over -1% after JPMorgan Chase lowered its rating from overweight to neutral.

Despite a challenging environment, gold mining stocks are rising today, with the price of COMEX gold up over +1%. Companies like Anglogold Ashanti Plc (AU) and Gold Fields Ltd (GFI) have seen increases of more than +1%.

Meanwhile, health insurance stocks, previously under pressure, are rebounding. UnitedHealth Group (UNH) has increased more than +3%, leading gains in the S&P 500 and Dow Jones. Humana (HUM) is up over +2%.

Sight (RXST) is performing well, gaining more than +11% after Wells Fargo Securities upgraded the stock to overweight from equal weight, targeting a price of $25. Take-Two Interactive Software (TTWO) has risen more than +3%, leading gains in the Nasdaq 100 after Morgan Stanley increased its price target to $265 from $210.

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

Earnings Reports (5/19/2025)

Companies reporting earnings 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 positions in any of the securities mentioned in this article. All information in this article is intended for informational purposes only. For further details, please view the Barchart Disclosure Policy here.

The views expressed herein are those of the author and do not necessarily represent those of any affiliated entity.