U.S. Credit Downgrade Adds Weight to Debt Concerns

May 19, 2025

Financial Markets

U.S. equity markets delivered a strong performance last week, logging five consecutive days of gains. Investor sentiment improved amid signs of easing trade tensions between the United States and China and headlines from the president’s high-profile trip to the Middle East.

Large-cap and small-cap U.S. stocks both advanced, supported by positive earnings reports and optimism around new trade negotiations. The president appeared to fill a role that suits him well at the Middle East meetings—that of a salesman. The trip led to several preliminary business agreements, and while details remain sparse, the meetings highlighted a strategic pivot toward leveraging political alliances for economic opportunity. Notably, many observers viewed the softening of the trade stance as a modest win for China; however, incremental progress may pave the way for more productive discussions.

Economics

Moody’s became the last of the “Big Three” agencies to strip the United States of its AAA credit rating, citing unsustainable debt levels and the absence of a credible plan to reduce them. While the downgrade was not unexpected, it underscores growing concern around fiscal discipline. The latest federal budget proposal does little to address the expanding debt burden. Nevertheless, the U.S. dollar remains secure in its role as the world’s reserve currency—largely because there are no viable alternatives at present.

Meanwhile, the administration’s Middle East trip is expected to yield billions of dollars in future commercial contracts. Though the long-term impact remains to be seen, the president’s strategy of aligning foreign policy with economic objectives signals a notable shift in geopolitical positioning.

Domestically, the Federal Reserve and Chair Jerome Powell continue to provide a source of calm. The Fed has maintained a consistent and measured approach in the face of conflicting economic signals, particularly regarding inflation. With neither runaway inflation nor an apparent slowdown in sight, monetary policy appears to be on pause until more definitive data emerges.

The European Central Bank (ECB) continues to ease monetary policy, with no indication of overheating in the eurozone economy. Elsewhere, China remains in a prolonged economic slump. Structural issues—including weak domestic demand—persist despite increased liquidity measures. Fiscal stimulus will likely be required to reinvigorate growth.

Conclusion

U.S. economic indicators remain broadly stable, and the Federal Reserve continues to strike a steady tone. However, investors should remain alert. Political volatility and growing concerns over fiscal sustainability pose risks to long-term confidence. As we’ve noted before, market performance is closely tied to investor sentiment—and right now, that sentiment is being tested.

While recent diplomatic developments offer potential upside, their durability is far from assured. The coming weeks will reveal whether Washington’s evolving international strategy can produce tangible economic benefits.

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