Stock Futures Drop as Moody's Downgrades U.S. Credit Rating

When the stock market finally recovered from the downturn caused by fears surrounding President Donald Trump’s tariff proposals, investors encountered new anxiety related to debt. This concern arose following a slide in markets on Sunday, triggered by Moody’s Credit Rating Agency downgrading the U.S. government’s credit rating to below AAA status.

Experts cautioned that the announcement made following the market's closure on Friday might trigger some short-term selling of equities and government bonds.

The Dow Jones Industrial Average futures declined by over 250 points, equivalent to a drop of 0.6%, as of Sunday night. Futures for the S&P 500 similarly decreased by 0.6%, whereas those for the Nasdaq-100 fell by 0.7%. Additionally, the ICE U.S. Dollar Index, which measures the currency's strength against key competitors such as the euro, saw a reduction of 0.4%.

Shares could face pressure from profit-taking after a significant rebound that reversed deep declines which nearly pushed the S&P 500 into a bear market last month when President Trump unveiled his tariff proposals on April 2nd. As the administration retreated from implementing some of the harshest tariffs, stocks rallied considerably; both the S&P 500 and the Dow Jones Industrial Average turned positive for the year-to-date last week. The S&P 500 surged by 5.3%, marking its largest single-week increase since April 2020.

“Given the prolonged and limited extent of the rally, this could trigger a reversal or stabilization,” stated Cam Hui, author of the Humble Student of the Markets blog. “We will have to wait and see just how pessimistically the markets react to the downgrade. Keep an eye out for updates.”

The SPDR S&P 500 Trust, which follows the index, dropped during post-market trading on Friday, whereas Treasury futures showed a decline as well.

On Friday, Moody’s announced they had downgraded the U.S. credit rating by a single step, moving it from Aaa to Aa1. The decision was made due to the rise in government debt and interest payments over the past ten years, which have reached levels notably above those of comparable countries with similar ratings.

Check out: The U.S. has recently lost its final unblemished credit rating. Here’s what this could mean for financial markets.

Moody's was the final major credit-rating agency to downgrade the U.S. from its triple-A status.

In August 2011, S&P Global Ratings became the first entity to strip the U.S. of its top-tier triple-A credit rating during a contentious debate about raising the national debt ceiling—a scenario that has increasingly played out in Washington ever since. This decision sent ripples through the political landscape at a time when stocks were plummeting towards the end of summer, partly because of the ongoing budget standoff and also due to escalating concerns over European sovereign-debt issues. Interestingly, despite this downgrade, Treasury securities saw an uptick as investors sought safer assets, leading to lower bond yields fueled by economic-growth fears.

In August 2023, Fitch Ratings followed suit, making their decision soon after another debt-ceiling crisis had been resolved.

Moody's announcement was made on the same day as the meeting of the House Budget Committee. failed to advance A comprehensive tax and expenditure measure serving as the main focus of President Donald Trump’s legislative program, highlighting significant rifts among Republicans.

Treasury Secretary Scott Bessent, within an interview on Sunday with NBC’s “Meet the Press,” waved away the downgrade. “I think Moody’s is a lagging indicator,” he said. “I think that’s what everyone thinks of credit agencies.”

Although investors have often contemplated the possibility of Moody’s following S&P and Fitch in downgrading the U.S., the unexpected action taken on Friday seemed to take them off guard, according to Michael Kramer, the founder of Mott Capital, who mentioned this in a statement. He noted that the response from the Treasury market would be significant.

"Many people are brushing off this news as insignificant, and maybe it isn’t important. The country has experienced two previous rating reductions," he noted.

Still, the timing is sensitive given current negotiations around the Republican-backed tax bill, he said. “The key issue is that this downgrade comes at a moment when term premiums were already rising, potentially adding even more upward pressure.”

Last week, the yield on the 10-year Treasury note increased by 6.3 basis points to reach 4.437%. It’s worth noting that yields and bond prices have an inverse relationship.

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