Moodys Downgrades US Credit Rating – what does it mean for equities?

Moody’s downgrade of the U.S. credit rating from “Aaa” to “Aa1” has immediate and longer-term implications for U.S. stocks. In the short term, the announcement triggered a decline in major stock indexes and a rise in Treasury yields, with the S&P 500 and related ETFs dropping about 1% in after-hours trading following the news

Moody’s downgraded the U.S. credit rating from “Aaa” to “Aa1,” citing persistently high federal debt and interest costs that now exceed those of similarly rated countries. This move follows the failure of President Trump’s tax bill in Congress, largely due to opposition from hardline Republicans demanding deeper spending cuts, with the bill projected to add trillions to the national debt over the next decade. Moody’s noted that successive U.S. administrations and Congress have failed to implement measures to reverse the trend of large annual deficits and rising interest expenses. The downgrade, which caused U.S. Treasury securities to fall and yields to rise, marks the first time all three major agencies-Moody’s, S&P, and Fitch-have rated the U.S. below the top tier.

Moody’s shifted the U.S. outlook from “negative” to “stable,” suggesting no further downgrades are anticipated soon unless conditions worsen. Experts like Darrell Duffie and Christopher Hodge emphasized that the U.S. still enjoys unmatched borrowing capacity and global demand for its debt, but warned that fiscal discipline will eventually be necessary. Some, like Stephen Moore, dismissed the downgrade as politically motivated, while others, including Brian Bethune, called it a wake-up call for Republicans to agree on credible deficit reduction measures. Overall, the downgrade is seen as a warning about unsustainable fiscal policy, with potential long-term consequences for borrowing costs and economic flexibility, but with limited immediate impact on markets due to the enduring status of U.S. Treasuries as the world’s most liquid and sought-after assets. Analysts note that the downgrade may prompt some investors to take profits after a recent rally, especially as concerns about fiscal policy and rising interest costs intensify.

However, many experts believe the downgrade’s impact on equities will likely be limited and short-lived, especially since Moody’s is the last of the three major agencies to act, and markets had already priced in much of the fiscal risk.