Moody’s US downgrade

U.S. stock markets closed nearly unchanged on Monday, as investor sentiment took a hit following a major credit downgrade by Moody’s. The global ratings agency downgraded the U.S. sovereign credit rating from its top-tier “Aaa” to “Aa1”, citing the nation’s ballooning $36 trillion debt and rising interest costs. The move, announced after markets closed on Friday, prompted a cautious start to the trading week, though stocks managed to rebound by the closing bell.

Despite the initial jitters, the S&P 500 still marked its sixth consecutive day of gains, with seven of its 11 sectors closing in the green. Leading the way were healthcare, consumer staples, industrials, materials, and utilities. However, energy and consumer discretionary sectors dragged on the broader market. The Dow Jones Industrial Average rose by 0.32%, the S&P 500 edged up 0.09%, and the Nasdaq Composite gained just 0.02%, underscoring the day’s muted momentum.

Among individual stocks, TXNM Energy surged 7% after announcing an $11.5 billion acquisition deal with Blackstone’s infrastructure unit. Novavax also enjoyed a 15% rally following long-awaited FDA approval of its COVID-19 vaccine. Regeneron Pharmaceuticals inched up 0.4% as it announced the acquisition of genomics company 23andMe Holdings for $256 million through a bankruptcy auction.

The downgrade, while impactful in the short term, may not carry long-term consequences for markets. Analysts at Sevens Report pointed out that the concerns Moody’s cited—such as growing deficits and rising interest expenses—are long-standing and well-known. The downgrade, they argued, is akin to stating the obvious. The U.S. fiscal trajectory is unsustainable, but it has not stopped the equity markets from delivering strong returns in recent years.

However, the move did lead to a minor uptick in long-term Treasury yields, as investors digested the news. The benchmark 10-year Treasury yield rose by 1 basis point to 4.449%. Some analysts believe that yields may continue to climb, but more so due to inflation and growth expectations than the Moody’s rating action. The real market drivers, according to Sevens, will be trade policy, economic resilience, and decisions from the Federal Reserve.

In the broader market context, the downgrade follows similar actions taken by S&P in 2011 and Fitch in 2023. Yet, despite these warnings, equities have continued to perform well. Market watchers are now focusing on upcoming tariff policies, U.S. economic indicators, and any signals from the Fed on potential rate cuts. While the fiscal outlook remains a concern, many believe it’s not yet a reason to exit the market.