Stocks Climb Off Lows After US Credit Rating Downgrade

The S&P 500 Index ($SPX) (SPY) today is up +0.14%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.37%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.12%.  June E-mini S&P futures (ESM25) are up +0.13%, and June E-mini Nasdaq futures (NQM25) are up +0.05%. 

Stock indexes today are trading mixed, and T-note yields jumped after Moody's Ratings stripped the US of its top credit rating.  Late last Friday, Moody's Ratings downgraded the US government's credit rating from Aaa to Aa1, citing a ballooning budget deficit and fiscal concerns.  The dollar also fell to a 1-week low, and the 1-year T-note yield jumped to a 5-week high of 4.562% as investors shed dollar assets on the news. Stocks rebounded from their lows on a wave of dip buying by investors.

The US already lost its top credit rating from S&P in 2011 and from Fitch in 2023.  With its downgrade on Friday, Moody's caught up with its competitors. 

The amount of outstanding Treasury securities has soared from $4.5 trillion in 2007 to nearly $30 trillion today, reflecting the explosion of government borrowing during the pandemic and the persistent inability of the US to curb its federal budget deficit.  Sifma, a bond market trading group, reports that annual gross sales of government debt ballooned from $362 billion in 2007 to $2.6 trillion last year. Also, the ratio of total US public debt to the size of the economy has risen from about 35% in 2007 to 100% today, according to the Congressional Budget Office.

Today's US economic news was bearish for stocks after the Apr leading economic indicators fell -1.0% m/m, right on expectations and the biggest decline in over two years.

Comments today from Atlanta Fed President Bostic were bearish for stocks and bonds when he said, "Given the trajectory of our two mandates, I worry a lot about the inflation side, and mainly because we're seeing expectations move in a troublesome way." He said he is leaning toward only one Fed rate cut this year.  He added that last Friday's decision by Moody's Ratings to downgrade their rating of US debt could have a negative impact on US companies and households who seek to borrow money.

Other Fed comments today signal policymakers want to wait for more information before deciding on the future of interest rates.  New York Fed President Williams said the Fed could take its time assessing new data before deciding on interest rates and that it "may need months" to better understand tariffs and other policies from the Trump administration and the outlook for the economy.  Also, Fed Vice Chair Jefferson said Fed policy is in a "very good place" and has a "moderately restrictive" effect on the economy.  He added, "Given the level of uncertainty that we're facing right now, I believe that it is appropriate that we wait and see how government policies evolve over time and their impact" on the economy.

The markets this week will focus on any tariff news or signing of any new trade deals.  On Thursday, weekly initial unemployment claims are expected to climb +1,000 to 230,00. Also, the May S&P manufacturing PMI is expected to fall -0.3 to 49.9.  Finally, on Thursday, Apr existing home sales are expected to climb +2.0% m/m to 4.10 million.  On Friday, Apr new home sales are expected to fall -4.7% m/m to 690,000.

The markets are discounting the chances at 8% for a -25 bp rate cut at the next FOMC meeting on June 17-18.

Q1 earnings reporting season is winding down.  So far, over 85% of companies in the S&P 500 have reported quarterly results, and 77% have beaten estimates, the highest since Q2 of 2024.  Earnings growth in Q1 is running at +13.1%, compared with just +6.6% expected before the start of the season.  Full-year 2025 corporate profits for the S&P 500 are seen rising +9.4%, down from the forecast of +12.5% in early January.  

Overseas stock markets today are mostly lower.  The Euro Stoxx 50 is down -0.26%.  China's Shanghai Composite closed unchanged.  Japan's Nikkei Stock 225 closed down -0.68%.

Interest Rates

June 10-year T-notes (ZNM25) today are down -8 ticks.  The 10-year T-note yield is up +1.6 bp to 4.493%.  June T-notes are under pressure today, and the 10-year T-note yield jumped to a 5-week high of 4.562% after Moody's Ratings late last Friday downgraded the US government's credit rating from Aaa to Aa1, citing a ballooning budget deficit and fiscal concerns.  The downgrade may prompt investors to demand higher yields to hold Treasuries.  T-notes are also under pressure on negative carryover from a slide in European government bonds.  In addition, comments today from Atlanta Fed President Bostic weighed on T-notes when he said he's seeing inflation expectations "move in a troublesome way." 

European government bond yields today are moving higher.  The 10-year German bund yield is up +0.2 bp at 2.592%. The 10-year UK gilt yield rose to a 5-week high of 4.726% and is up +1.7 bp to 4.666%.

ECB President Lagarde said the dollar's recent decline against the euro reflects "the uncertainty and loss of confidence in US policies among certain segments of the financial markets."

ECB Governing Council member Muller said while it may be justified to ease monetary policy further, "it's not obvious to me that the ECB should significantly lower rates."

Swaps are discounting the chances at 91% for a -25 bp rate cut by the ECB at the June 5 policy meeting.

US Stock Movers

The weakness of the Magnificent Seven Stocks is weighing on the broader market.  Tesla (TSLA) is down more than -3%, and Apple (AAPL) is down more than -2%.  Also, Alphabet (GOOGL) is down -0.93% and Meta Platforms (META) is down -0.37%.  In addition, Amazon.com (AMZN) is down -0.30% and Nvidia (NVDA) is down -0.27%. 

Chip stocks are sliding today.  Advanced Micro Devices (AMD), Marvell Technology (MRVL), ARM Holdings Plc (ARM), and ON Semiconductor (ON) are down more than -2%.  Also, Applied Materials (AMAT), Intel (INTC), Microchip Technology (MCHP), NXP Semiconductors NV (NXPI), Lam Research (LRCX), and GlobalFoundries (GFS) are down more than -2%. 

Reddit (RDDT) is down more than -4% after Wells Fargo Securities downgraded the stock to equal weight from overweight. 

NuScale Power (SMR) is down more than -3% on signs of insider selling after an SEC filing showed CEO Hopkins sold $623,375 worth of shares last Thursday. 

Shake Shack (SHAK) is down more than -2% after TD Cowen downgraded the stock to hold from buy, citing an already high valuation amid a challenging consumer spending backdrop. 

Netflix (NFLX) is down more than -1% after JPMorgan Chase downgraded the stock to neutral from overweight. 

Gold mining stocks are climbing today, with the price of COMEX gold up by more than +1%.  Anglogold Ashanti Plc (AU) and Gold Fields Ltd (GFI) are up more than +1%.

Recently beaten-down health insurance stocks are rebounding today. UnitedHealth Group (UNH) is up more than +3% to lead gainers in the S&P 500 and Dow Jones Industrials. Also, Humana (HUM) is up more than +2%.

Sight (RXST) is up more than +11% after Wells Fargo Securities upgraded the stock to overweight from equal weight with a price target of $25. 

Take-Two Interactive Software (TTWO) is up more than +3% to lead gainers in the Nasdaq 100 after Morgan Stanley raised its price target on the stock to $265 from $210.

Solventum (SOLV) is up more than +1% after being upgraded by Piper Sandler to overweight from neutral with a price target of $87.

AutoZone (AZO) is up more than +1% after TD Cowen raised its price target on the stock to $4,300 from $3,900. 

Earnings Reports (5/19/2025)

8x8 Inc (EGHT), Agilysys Inc (AGYS), Aldeyra Therapeutics Inc (ALDX), Gencor Industries Inc (GENC), Safe Bulkers Inc (SB), Target Hospitality Corp (TH), Transcat Inc (TRNS).