Rating downgrade didn’t spook US markets, but the fundamental picture is deteriorating

US indices reacted swiftly to Moody’s top US credit rating downgrade. On previous occasions of similar decisions (in August 2011 by S&P Global and in August 2023 by Fitch), the markets showed a multi-day decline of about 10% and continued the downtrend over the following two to three months. It should be noted that additional negative factors contributed to the markets’ decline at that time.

This time, the situation turned out to be different: the comments of the US authorities’ representatives about the lateness of the decision contributed to the market recovery. Investors promptly bought back the 1.5% drawdown, which allowed the Nasdaq 100 and S&P 500 indices to renew their two- and three-month highs.

Technical analysis on weekly charts shows positive dynamics. Last week, the S&P 500 and Nasdaq 100 indices broke above their 50-week moving average, developing a rebound from the area near the 200-week average from early April. Both indices need to rise a little more than 3% to return to all-time highs, which does not align with pessimistic expectations from trade wars.

On the other hand, such a rise makes stocks more expensive. We recognise the potential damage to global trade due to tariffs that create barriers, hindering the expansion of US companies.

Compared to conditions before ‘Liberation Day,’ stocks look more overvalued. A recovery amid a deteriorating fundamental picture inspires confidence in making new highs, but be prepared for possible market lethargy at levels above 6000 on the S&P 500 and 22000 on the Nasdaq 100, as well as an increased frequency of corrective pullbacks.

The FxPro Analyst Team