Market Recap: Stocks Waver After Moody’s Downgrades U.S. Credit Rating

by Ed Liston · May 19, 2025

Major Indexes Mixed as Markets React to U.S. Credit Downgrade

The U.S. stock market showed mixed performance on Monday, May 19, 2025, as investors digested Moody’s downgrade of U.S. sovereign debt from AAA to Aa1. The downgrade, which occurred late Friday, removed America’s last top-tier credit rating and sparked concerns about the nation’s fiscal trajectory.

As of the latest trading session, the Dow Jones Industrial Average (^DJI) was up 0.21% at 42,744.26, recovering from earlier losses after futures had indicated a potential 350-point drop. The S&P 500 (^GSPC) slipped slightly by 0.04% to 5,956.27, breaking its five-day winning streak that had pushed the index near the 6,000 milestone. Meanwhile, the tech-heavy Nasdaq Composite (^IXIC) declined 0.13% to 19,186.30.

Moody’s Downgrade Rattles Markets

Moody’s decision to downgrade U.S. debt cited “large fiscal deficits and rising interest costs” as primary concerns. The ratings agency specifically warned about the trajectory of increased government spending and the potential extension of President Donald Trump’s 2017 tax cuts, which could add approximately $4 trillion to the deficit over the next decade.

Treasury Secretary Scott Bessent downplayed the move, calling it “a lagging indicator” during a Sunday interview on NBC News. Nevertheless, the downgrade pushed bond yields higher, with the benchmark 10-year Treasury yield rising to 4.523% early Monday, while 30-year yields briefly touched 5% for the first time since late 2023.

Market Sentiment and Volatility

The CBOE Volatility Index (^VIX), often referred to as the market’s “fear gauge,” rose 4.93% to 18.09, reflecting increased investor uncertainty. Adding to market concerns, the House Budget Committee approved President Trump’s tax-and-spending bill late Sunday, a proposal projected to further increase the deficit.

Despite today’s cautious trading, last week was impressive for Wall Street, with the Dow, S&P 500, and Nasdaq Composite rallying 3.4%, 5.3%, and 7.2%, respectively, buoyed by positive developments in U.S.-China trade relations.

Notable Stock Movers

Among tech giants, Alphabet (GOOGL) gained 1.4% while Micron Technology (MU) rose 2.7%, helping to limit losses in the Nasdaq.

The market is also reacting to President Trump’s weekend comments targeting Walmart for indicating it would raise prices in response to tariffs. Trump suggested the retail giant and China should “eat the tariffs” rather than passing costs to consumers. Similarly, Diageo, the company behind Smirnoff and Johnnie Walker, warned of a potential $150 million hit from tariffs, though it noted half could be offset through price increases and supply-chain adjustments.

Upcoming Market Events to Watch

Investors are looking ahead to a busy earnings week, with several major retailers reporting results that could provide insights into consumer spending and the impact of tariffs on prices. Home Depot (HD) will report on Tuesday, followed by Target (TGT) and Lowe’s (LOW) on Wednesday. Other notable companies reporting this week include Palo Alto Networks (PANW), Baidu (BIDU), Snowflake (SNOW), Zoom (ZM), and Autodesk (ADSK).

On the economic data front, S&P Global will release its manufacturing and services PMI on Thursday, while housing market data will come from existing-home sales (Thursday) and new home sales (Friday).

Market Outlook

Federal Reserve officials continue to monitor the impact of tariffs on the economy. New York Fed President John Williams noted that uncertainty caused by tariffs has led the Federal Reserve to hold rates steady this year, and the path forward might not become clearer for months.

As markets navigate these fiscal and monetary challenges, investors remain cautious about U.S. debt levels while still seeking opportunities in sectors showing resilience. The utilities and healthcare sectors showed strength last week, with the Utilities Select Sector SPDR (XLU) and the Health Care Select Sector SPDR (XLV) rising 1.5% and 2%, respectively.

With ongoing concerns about fiscal policy, trade tensions, and upcoming corporate earnings, market participants will be closely monitoring how these factors might influence Federal Reserve decisions and overall market direction in the coming weeks.