U.S. stock futures are slipping sharply in early trading today, with S&P 500 futures down more than 1% since the start of the Asian session.
This negative weekly kick-off for U.S. equities comes amid mounting concerns over the trajectory of the U.S. economy, following a series of warning signals—the latest being a credit rating downgrade by Moody’s.
The agency downgraded the U.S. sovereign credit rating from Aaa to Aa1, while maintaining a stable outlook.
The downgrade was driven by persistent concerns over the sustainability of the federal deficit and the lack of substantial policy actions by lawmakers or the administration to reverse its trajectory.
Although this downgrade does not necessarily spell doom for the economy—similar actions have already been taken by Fitch and S&P Global Ratings long time ago—it could translate into structurally higher borrowing costs. That, in turn, could reduce the resilience of the stock market and lead to heightened volatility.
The downgrade comes at a time when broader worries are already intensifying about the long-term strength of the U.S. economy. Adding to that, expectations of inflationary pressures due to tariffs have been fuelling a sharper rise in long-term Treasury yields compared to shorter-dated ones.
The yield spread between 10-year, and 2-year U.S. Treasuries has widened again today, reaching 0.53%—its highest level since early May and nearing the highest point since 2022.
Meanwhile, upside risks to inflation continue to keep the Federal Reserve cautious about cutting interest rates this year—another factor that’s hindering a stock market rebound. According to CME’s FedWatch Tool, markets now do not expect a rate cut before September.
On a more constructive note, amid this otherwise bearish backdrop, I believe Donald Trump and his administration are likely to proceed with greater caution and less haste in policymaking—especially regarding decisions that directly affect equity and bond markets, such as trade policy. We’ve already seen Trump pivot toward trade de-escalation in the past following warning signals from the bond market, and now the credit downgrade has further eroded market resilience.
