Although two earlier significant U.S. credit downgrades in recent years caused a tumultuous response from technology companies, Friday’s most recent Moody’s rating cut isn’t anticipated to have a significant impact on tech equities this year.
On its 21-notch rating system, Moody’s (MCO) downgraded the U.S. government’s credit rating from Aaa to Aa1. The company pointed to the rise in government debt over the previous decade and interest-payment ratios that had risen to levels far higher than those of nations with comparable ratings.
The stock market reacted strongly in 2011 when S&P Global reduced the U.S.’s credit rating from AAA to AA+ because there were a lot of unknowns, including how institutional investors would change their positions in accordance with their mandates. Charles-Henry Monchau, chief investment officer of Syz Group, added that when investors are unsure, they sell immediately and inquire later. He anticipates a more subdued response this time because we’ve gone through this previously.
The Technology Select Sector SPDR Fund XLK, which covers the technology sector of the S&P 500, dropped 6.2% in the first session after the S&P Global downgrading on August 5, 2011, as seen in the chart below. During the same period, the tech-heavy Nasdaq fell 7.8%, according to Dow Jones Market Data. The sector experienced volatility in the subsequent month.
The fund and index’s response to Fitch’s U.S. credit downgrade on Tuesday, August 1, 2023, is depicted in the chart below. The next day, the Technology Sector SPDR dropped 2.3%, and by the end of the week, it had down almost 4%. According to Dow Jones Market Data, the Nasdaq dropped 2.6% the next day and 3% at the end of the week. The sector also experienced volatility in the month that followed.
According to Monchau, Moody’s rating last week wasn’t a major shock. This action was expected since the firm had downgraded its U.S. sovereign-credit rating outlook from stable to negative in November 2023. Nevertheless, the market responded quickly, as Monday morning’s opening saw stocks begin lower, with the S&P 500 down 0.9%. Before both indices erased their losses and ended the day, the tech-heavy Nasdaq was down 1.4%. Despite a 0.8% morning decline, the Technology Select Sector SPDR Fund recovered the majority of its losses.
The 10-year and 30-year yields, meanwhile, reached intraday highs of 4.57% and 4.91% on Monday, respectively, before resettling around 4.45% and 4.91%.
Tech companies are more at risk from rising bond yields, mostly because government bonds’ greater returns make them more attractive than stocks. Government bonds are utilized as the risk-free rate that is benchmarked against other assets since, even with a less favorable U.S. credit rating, they still carry less risk than equities. In other words, investors are increasingly choosing government bonds with lower risk yields of 4.5% to 5% over erratic growth equities with long-term outlooks.
However, the enthusiasm surrounding artificial intelligence has given tech stocks a little boost this time. Hyperscalers still intend to invest heavily in the development of AI infrastructure. While Nvidia Corp.’s (NVDA) results are expected next week, five of the “Magnificent Seven” companies—Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG) (GOOGL), Apple Inc. (AAPL), Meta Platforms Inc. (META), and Microsoft Crop. (MSFT)—had strong first-quarter earnings.
Investors were somewhat more reassured following President Donald Trump’s announcement of a temporary reduction in reciprocal tariffs between the United States and China, despite the fact that many of the major tech companies provided essentially ambiguous guidance.
Big Tech’s 2025 losses haven’t been eliminated. This year, the Roundhill Magnificent Seven ETF (MAGS) has still lost roughly 3.5 percent. However, based on their earnings-growth projections, Goldman Sachs analysts stated in a note dated May 16 that they still anticipated the seven equities as a group to beat the market, albeit by a lesser amount than they did in recent years.
