U.S. Credit Downgrade Casts a Shadow on Market Momentum

[Samiat]

Market Outlook: Week of May 20th, 2025
Key Theme: U.S. Credit Downgrade Casts a Shadow on Market Momentum

1. Market Recap – Last Week’s Rally
Last week, the U.S. equity markets surged, driven by optimism around a temporary trade truce between the U.S. and China. Tech stocks led the charge, with Tesla (+17%) and Nvidia (+16%) topping the leaderboard. The major indexes closed sharply higher:

• S&P 500: +5.3%
• Nasdaq Composite: +7.2%
• Dow Jones Industrial Average: +3.4%

Despite global economic uncertainties, investor sentiment was buoyed by strong earnings and easing geopolitical concerns.

2. New Risk: Moody’s Downgrades U.S. Credit Rating
Over the weekend, Moody’s Ratings downgraded U.S. sovereign credit by one notch — from Aaa to Aa1 — citing the nation’s expanding budget deficit and debt burden.

“The growing fiscal deficit and lack of a long-term plan to stabilize debt are eroding the country’s creditworthiness,” Moody’s stated.

This now places the U.S. below the top credit rating across all three major rating agencies (S&P downgraded in 2011, Fitch in 2023).

3. Immediate Market Reaction (Sunday Evening & Monday Pre-market)

• U.S. Futures:
  • S&P 500: -1.1%
  • Nasdaq 100: -1.5%
  • Dow Futures: -0.7% (-291 pts)
• Treasury Yields:
  • 10-year yield: ↑ to 4.51%
  • 30-year yield: briefly hit 5.00% — a key psychological level
• U.S. Dollar Index: ↓ 0.3%
• Gold: +0.8%, benefiting from flight to safety
• European/Asian markets: mostly in the red

This downgrade introduces fresh pressure on Treasury bonds and equities, particularly in a market already grappling with inflation and geopolitical risks.

4. Key Earnings to Watch This Week
Retail earnings take center stage and will provide insight into consumer sentiment and discretionary spending:

• Home Depot
• Target
• TJX Companies

Expect any surprises — positive or negative — to move the broader market.

5. Nvidia’s Growing Challenge in China
Despite its impressive stock performance, Nvidia faces regulatory headwinds due to chip export restrictions to China. The company denied reports of bypassing restrictions, but investors remain cautious.

CEO Jensen Huang called the potential loss of access to China’s AI market a “tremendous setback,” especially as China’s AI industry is projected to hit $50 billion in value within three years.

6. Political Noise Adds to Uncertainty

• Former U.S. President Donald Trump has voiced intent to broker a Ukraine-Russia ceasefire, adding potential diplomatic shifts to watch.
• Reports also emerged that President Joe Biden has been diagnosed with prostate cancer, which could stir political discussions ahead of the election cycle.

Final Thoughts
The downgrade throws a wrench into last week’s bullish momentum. Markets may experience increased volatility, especially in rate-sensitive sectors like tech and real estate. Keep an eye on bond yields, earnings reports, and any geopolitical updates from Washington or abroad.

Trade cautiously. Stay informed. Risk-manage wisely.