U.S. stocks fell and Treasury yields rose,after Moody's downgraded the U.S. credit rating, citing rising government debt and increased interest burdens.
The downgrade comes after rival Fitch downgraded the US sovereign rating, which it also downgraded by one notch in August 2023, citing an expected deterioration in the US fiscal situation and repeated deadlocks in debt ceiling negotiations that threaten the US government's ability to repay its debts.
Fitch is the second major rating agency to remove the US's top AAA rating after Standard & Poor's removed it after the 2011 debt ceiling crisis.
At that time, US stocks fell for three consecutive months until the end of October and then opened a long bull market until February 2025.
The $S&P 500(.SPX)$ fell 1% in after-hours trading after the agency downgraded the U.S. credit rating to Aa1 from Aaa. $Invesco QQQ(QQQ)$ ETF fell 1.3% and Treasury futures closed at intraday lows.
Moody's downgraded the U.S. credit rating, citing rising government debt, a move that casts a shadow on the country's status as the world's top sovereign borrower. The company joins Fitch and S&P Global in downgrading the world's largest economy to below the top AAA rating.
The move by Moody's adds to the risks facing U.S. markets as President Trump's erratic tariff moves weigh on the economic outlook. While the S&P 500 has recovered from last month's plunge, many Wall Street pros remain skeptical of the rally as the impact of tariffs on business and consumer confidence could show up in economic data in the coming months.
Here are how investors and market watchers reacted to the news:
Eric Beiley, Executive Managing Director of Wealth Management at Steward Partners:
"This is a warning sign. U.S. stocks are about to top out after a much-welcomed rally. The credit rating downgrade by Moody's could trigger some profit-taking by fund managers after the sharp gains in the stock market over the past month"
Ivan Feinseth, Chief Investment Officer at Tigress Financial Partners:
"U.S. Treasuries are viewed as the safest investment in the world. When the U.S. credit rating is downgraded, the impact on sovereign debt of other countries could be more negative because the U.S. is the benchmark. How this will affect the stock market in the coming weeks remains to be seen, but caution is likely given the recent strong gains in the stock market."
Dave Mazza, Roundhill Investments CEO:
"Although Moody's finally made this official decision, the market may have anticipated the downgrade of the US credit rating for some time. Unlike the shock of S&P's downgrade of the US rating in August 2011, this downgrade occurred when the market was already alert to fiscal imbalances and tariff risks - which means the impact on the stock market may be smaller than the initial news reports suggest"
Thomas Thornton, founder of Hedge Fund Telemetry LLC:
"This is not good for the entire US market. This is different from S&P's downgrade of the US's AAA rating in 2011, which was a shocking event and the market was already shaky. The bond market yields rose in late trading. For me, rising yields, faster and larger increases have always been the top risks"
Kim Forrest, chief investment officer of Bokeh Capital Partners LLC:
"This is not the first time that the US has been downgraded. I think it is a wake-up call. Although I know that the future may be unstable, we will see what happens next. Because for informed investors, none of this is news. Especially when we talk about debt, the most important part of our discussion is bond investors. They know it well."
Dan Greenhaus, Chief Market Strategist at Solus Alternative Asset Management LP:
"The U.S. is currently running a large peacetime budget deficit, perhaps the largest we've ever seen in our lifetimes. But we all knew that. Moody's isn't telling us anything new."
Michael O'Rourke, Chief Market Strategist at JonesTrading:
"I expect the stock market to experience a bout of profit taking after a strong rally. When S&P downgraded the U.S. in 2011, Treasuries initially sold off, but then there was safe-haven buying and bond prices began to rise."
Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services:
"I don't think this is a game changer, but it does provide an excuse for a little profit taking. However, it does highlight that deficits could rise."
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