US Stock Market Declines Following Credit Rating Downgrade

(Bloomberg) — American stocks fell while Treasury yields increased after Moody’s Ratings lowered the US credit rating, attributing the decision to a rise in government debt and escalating interest expenses.

Market Reactions Post-Downgrade

An ETF tracking the S&P 500 Index saw a 1% drop in after-hours trading following the downgrade from Aaa to Aa1. The Invesco QQQ Trust Series 1 ETF decreased by 1.3%, with Treasury futures closing at their lowest points of the session. The Bloomberg Dollar Index paused at 4 p.m. in New York just before Moody’s announcement.

Reasons for the Downgrade

Moody’s linked the downgrade to increased government debt, impacting the US’s reputation as the world’s premier sovereign borrower. This decision aligns Moody’s with Fitch Ratings and S&P Global Ratings, which have also rated the US below the top AAA score.

Concerns About Economic Outlook

This downgrade adds to the existing risks faced by the US market, especially as President Donald Trump’s inconsistent tariff policies affect economic projections. Even though the S&P 500 has bounced back from last month’s low points, many investors on Wall Street remain skeptical about this recovery, given the potential impact of tariffs on business and consumer confidence.

Investor Reactions

Eric Beiley, from Steward Partners, warned that the stock market is nearing its ceiling after a recent rally and suggested that the downgrade might trigger profit-taking among managers. Ivan Feinseth of Tigress Financial Partners commented on how the downgrade could negatively affect other countries’ sovereign debts, as US Treasury bonds are globally regarded as the safest investments.

Experts Share Insights

Dave Mazza from Roundhill Investments noted that this downgrade might not have the same shocking effect as S&P’s 2011 downgrade, due to the current market’s prior awareness of fiscal issues. Thomas Thornton from Hedge Fund Telemetry LLC expressed concerns about the rising rates in the bond market, viewing it as a primary risk factor. Meanwhile, Dan Greenhaus highlighted that this situation of increased budget deficits is well-known among investors.

Future Implications

Analysts agree that inflationary pressures from high debt servicing costs could lead to investors reallocating away from Treasuries. Michael O’Rourke from JonesTrading anticipates profit-taking in the equity markets, reminiscent of reactions post-2011 downgrade, while Keith Lerner of Truist Advisory Services believes the downgrade highlights ongoing deficit concerns without being a game changer.