Wall Street started the week on shaky ground as Moody’s stripped the United States of its last pristine credit rating, knocking it down from Aaa to Aa1.
The downgrade, announced late Friday, sent ripples through global markets and sparked a sharp selloff in US stock futures Monday morning.
Dow futures fell over 340 points, while the S&P 500 and Nasdaq 100 dipped 1.2% and 1.6% respectively, snapping last week’s bullish momentum that had been driven by a temporary truce in the US-China tariff war.
Why Did Moody’s Downgrade the US?
Moody’s cited escalating deficits and mounting debt servicing burdens amid elevated interest rates as the reason for the downgrade. Analysts warned that if unchecked, the US debt is projected to balloon past 134% of GDP by 2035. This aligns Moody’s with Fitch and S&P, both of which previously revoked the US government’s top-tier rating.
“A Treasury downgrade is unsurprising amid unrelenting unfunded fiscal largesse,” said Max Gokhman, deputy CIO at Franklin Templeton. “Investors may start gradually swapping Treasuries for other safe-haven assets.”
Treasury Yields Hit 5%
The reaction in the bond market was swift. The 30-year Treasury yield surged to 5%, reigniting fears of a “bear steepener”, a phenomenon where long-term rates rise faster than short-term ones, threatening the broader equity landscape. The 10-year Treasury yield also climbed past 4.5%, nearing levels last seen in 2023.
Trump’s Tariff Tantrum Fuels Retail Uncertainty
Adding to market anxieties, President Trump lashed out at Walmart over price hikes linked to tariffs. “Walmart should EAT the tariffs,” Trump said, accusing the retail giant of padding profits while blaming consumers. Walmart’s stock dipped nearly 2% in pre-market trading, and executives remained tight-lipped, citing thin margins and global inflation.
This follows a recent trend of Trump doubling down on protectionist policies while pushing his tax reform agenda — another market-moving theme after his “Big Beautiful Bill” advanced in the House Budget Committee, despite concerns it could add $3-5 trillion to the deficit.
Nvidia and Tech Also Feel the Heat
Even market darling Nvidia wasn’t spared, sliding nearly 3% after unveiling humanoid robots and custom AI server tech at Taiwan’s Computex Expo. While investors have high hopes for Nvidia’s AI expansion, some analysts cautioned the market was “priced for perfection.”
Morgan Stanley: Buy the Dip?
In a note to clients, Morgan Stanley’s Michael Wilson urged investors to treat this as a buying opportunity. “We would be buyers of such a dip,” he wrote, citing cooling recession risks amid a softened US-China tariff stance.
What to Watch This Week
- Earnings reports from Target, Home Depot, and Workday.
- Jobless claims and manufacturing data, both seen as indicators of underlying economic strength.
- Continued reaction to Trump’s fiscal agenda and mounting debt concerns.
Bottom Line:
The loss of the US’s last top-tier credit rating is more than symbolic. It may reshape how institutional investors perceive Treasury securities, while rising yields and tariff-fueled uncertainty rattle equity markets. As Trump’s policies continue to shake up trade and tax fundamentals, Wall Street is bracing for more volatility, but also sniffing out tactical opportunities.
