U.S. Loses AAA Credit Rating: Major Indices Decline as Tech Stocks Slump — Tesla Drops Over 4%, Apple Falls More Than 2%

I. Core Logic and Background of the Downgrade

1. Trigger Factors
   • Deteriorating Debt and Interest Burden: The U.S. federal debt-to-GDP ratio is projected to rise from 98% in 2024 to 134% by 2035, with interest payments increasing from 73% to 78% of total expenditures.
   • Unsustainable Fiscal Policy: Republican-led tax cuts could add 3–5trilliontothedebtoverthenextdecade.Thefiscaldeficitforthefirsthalfof2025alreadyreached3–5trilliontothedebtoverthenextdecade.Thefiscaldeficitforthefirsthalfof2025alreadyreached1.3 trillion, the second-highest semi-annual level in history.
   • Consensus Among Rating Agencies: Following S&P (2011) and Fitch (2023), Moody’s downgrade marks the loss of the U.S.’s AAA rating across all three major agencies, signaling systemic fiscal risks.
2. Market Warning Signals
   • Policy Gridlock Risks: Partisan divisions threaten fiscal reforms, with debt ceiling negotiations likely to become a political battleground.
   • Erosion of Dollar Confidence: The downgrade weakens the perception of U.S. debt as a “risk-free” asset, potentially accelerating shifts in global reserve currency dynamics.

II. Immediate Market Reactions

1. Equity Markets: Mixed Signals
   • S&P 500: Closed at 5,945.29 (-0.22%) on May 20, 2025, reflecting caution amid growth concerns.
   • Dow Jones: Rose 0.17% to 42,726.25, buoyed by defensive sectors and blue-chip stability.
   • Nasdaq: Fell 0.42% to 19,130.98, with tech stocks (Palantir, Tesla, Nvidia) underperforming due to higher borrowing cost fears.
   • Context: Prior gains (Nasdaq +7%, S&P +5%, Dow +3% the previous week) were driven by U.S.-China tariff reductions, but the downgrade triggered profit-taking, especially in growth-sensitive tech.
2. Bond Market: Rising Yields
   • 10-Year Treasury Yield: Jumped to 4.485% (+0.99%) on May 20, peaking at 4.55% intraday.
   • 30-Year Yield: Surged to 5.02%, reflecting heightened long-term debt sustainability fears.
   • Implications: Higher yields may pressure government and corporate borrowing, stifling economic growth. Analysts warn of a “reckoning” for fiscal imprudence (Mark McCormick, TD Securities).
3. Gold: Safe-Haven Surge
   • Price: Gold futures rose 1.62% to $3,238.70/oz on May 20, extending 2025’s 23.1% rally.
   • Drivers: Dollar weakness, trade tensions, and the downgrade amplified demand for alternatives to U.S. dollar-denominated assets.

III. Economic Outlook and Policy Risks

1. Macroeconomic Weakness
   • Q1 2025 GDP: Contracted 0.3% (annualized), the worst since 2022, signaling stagflation risks.
   • Tariff Policy Impact: Trump-era tariffs, if reinstated, could exacerbate inflation (60% tariffs on Chinese EVs) and unemployment.
2. Monetary Policy Dilemma
   • Fed’s Stance: Atlanta Fed President Raphael Bostic flagged persistent inflation, projecting only one 2025 rate cut but stressing “3–6 months of clarity” needed.
   • Market Expectations: Rate cuts remain contingent on fiscal discipline progress, which the downgrade complicates.

IV. Analyst Perspectives

• Bearish Views:
  • Peter Boockvar (Bleakley): The downgrade is symbolic but critical, exposing long-ignored debt risks.
  • Vasu Menon (OCBC): Accelerates the decline of “American exceptionalism,” favoring non-U.S. assets.
• Neutral/Constructive Views:
  • Stephane Deo (Eleva Capital): Yield moves align with fundamentals; equities correcting from overbought levels.
  • Michael Wilson (Morgan Stanley): Advises buying dips, citing reduced recession risks post-trade truce.

V. Long-Term Implications

1. Fiscal Reforms Urgency
   • Debt Trajectory: Without tax/spending adjustments, debt-to-GDP could exceed 130% by 2035, risking a sovereign debt crisis.
   • Political Challenges: Bipartisan cooperation is essential but unlikely in an election year, raising default risks.
2. Global Ramifications
   • Dollar Hegemony: Erosion of trust in U.S. debt may accelerate dedollarization, boosting gold, cryptocurrencies, and rival currencies (yuan, euro).
   • Asset Allocation Shifts: Pension funds and central banks could diversify away from Treasuries, raising U.S. financing costs.