Rating agency Moody's downgraded the U.S. government's credit rating by one notch from the highest level of "Aaa" to "Aa1," mainly due to the significant increase in government debt over the past decade and the fact that the current interest payment ratio is significantly higher than that of countries with similar ratings. Although the rating remains high, this change has caused some volatility in the market.
However, market experts believe that the impact this time is far less than the market turmoil that occurred in 2011 when S&P first downgraded the U.S. rating from AAA to AA+. Back then, institutional investors were unsure how to adjust their positions based on investment authorizations, leading to a strong reaction in the stock market. Charles-Henry Monchau, Chief Investment Officer of Syz Group, pointed out, "Investors are now calmer because the market has experienced similar situations."
Data shows that on August 5, 2011, the first trading day after S&P's downgrade, tracking...S&P 500The SPDR Fund (XLK.US), a technology selection fund within the technology sector, plunged 6.2%, while the Nasdaq index, dominated by technology stocks, plunged 7.8%. Over the following month, technology stocks continued to fluctuate.
On August 1, 2023, after another rating agency, Fitch, downgraded the US rating, XLK fell 2.3% the following day, with a cumulative weekly drop of about 4%. The Nasdaq fell 2.6% the following day and 3% in a week. Both rating adjustments triggered significant short-term volatility in technology stocks.
In comparison, Moody's downgrade is not surprising. As early as November 2023, the agency had downgraded the outlook for the U.S. credit rating from "stable" to "negative," and the market was already mentally prepared. Therefore, the market reaction was relatively mild after the rating was released last Friday.
Although the S&P 500 fell as much as 0.9% and the Nasdaq fell 1.4% at the opening bell on Monday, both major indices recovered their losses and rose that day. XLK fell 0.8% in early trading that day and ultimately closed roughly flat.
Although the impact of this rating downgrade itself is limited, the rise in US Treasury yields is the greater risk facing technology stocks. On Monday, the yield on 10-year US Treasury bonds once touched 4.57%, and the yield on 30-year bonds broke through 5%, eventually falling back to 4.45% and 4.91% respectively.
Rising yields mean that government bond yields are more attractive, thus weakening the appeal of high-growth assets such as technology stocks. Even with a credit rating downgrade, government bonds are still considered "risk-free" assets, with an annualized return of 4.5%-5% being more attractive than technology stocks with uncertain future returns.
Despite facing upward pressure on yields, technology stocks are not entirely without bright spots. The artificial intelligence boom is providing a "tailwind" for the technology sector. Major cloud computing service providers still plan to increase investment in AI infrastructure.
In addition, five of the "Big Seven" tech giants are...Amazon(AMZN.US),Googleparent company Alphabet (GOOG.US, GOOG;.US),Apple(AAPL.US), Meta (META.US), andMicrosoft(MSFT.US) delivered impressive results in its first-quarter earnings report. chip giantNVIDIA(NVDA.US) will also release its earnings report this week, drawing close attention from the market.
Despite conservative earnings forecasts from many companies, investor confidence has rebounded, partly due to President Trump's announcement of a temporary reduction in US-China tariffs, which provided an additional boost to technology stocks.
However, overall, the "Big Seven" still underperformed the broader market. As of now,Roundhill Magnificent Seven ETF(MAGS.US) is still down approximately 3.5% for the year.
Nevertheless,Goldman SachsThe report released on May 16 pointed out that based on the future profit growth expectations of the seven major technology companies, they are expected to continue to outperform the market in 2025, but the excess returns may not be as significant as in the past few years.
