U.S. Credit Rating Downgraded Again: What History Tells Us About the Stock Market’s Next Move

In a move that surprised some but had long been anticipated, Moody’s downgraded the United States government’s credit rating from its highest level, “Aaa,” to “Aa1,” marking the third downgrade by a major agency since 2011. While the stock market took the news in stride, experts warn that the underlying issues prompting the downgrade could have long-term consequences.

Moody’s joins S&P Global, which downgraded the U.S. in 2011, and Fitch, which followed suit in 2023. All three agencies have cited the same root cause: the federal government’s persistent failure to curb ballooning deficits and long-term debt accumulation. Moody’s pointed to growing fiscal imbalances, stagnant revenue growth, and rising entitlement spending as key drivers behind its decision.

The U.S. posted a deficit of over $1.8 trillion in 2024 and now carries more than $36 trillion in total debt. Moody’s projects that if current fiscal trends continue, deficits could rise to 9% of GDP by 2035, with total debt exceeding 134% of GDP,  a level not seen since World War II. Alarmingly, interest payments on that debt, already 18% of federal revenue, could soar to 30% within a decade.

The downgrade also cited political developments, particularly House Republicans’ push to extend the 2017 tax cuts via their “One Big Beautiful Bill.” Moody’s estimates that extending these cuts, alongside proposed new ones,  could add $4 trillion to the deficit over the next ten years, not including interest.

Despite these warnings, historical precedent suggests that credit downgrades haven’t dramatically altered the trajectory of the stock market. When S&P downgraded the U.S. in 2011, the S&P 500 fell sharply but rebounded within months. A similar pattern occurred after Fitch’s 2023 downgrade: a brief correction, followed by a strong recovery.

Analysts suggest the resilience comes largely from the unique position of the U.S. dollar as the world’s reserve currency. Global investors still consider U.S. Treasuries among the safest assets, meaning that even with a lower rating, demand and relative confidence remain strong.

- Advertisement -

However, the muted market reactions of the past may not last forever. As borrowing costs rise with higher bond yields, the economy could feel greater pressure. The stock market might eventually respond if investors start to lose long-term faith in the U.S. government’s ability to manage its finances.

In short, while Wall Street may appear unconcerned for now, this downgrade serves as another warning signal in a growing pile of fiscal red flags. Whether investors continue to shrug it off or finally take notice remains to be seen.