We view the Moody's downgrade (of USA debt from AAA) as largely non-event and would buy the dip. Array ( [cookie] => 8a66c5-c71131-836b46-461cdc-2e3731 [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 0 [user_id] => 0 [reason] => Usage under limits [method] => ) 1 and can accesss 1

Over the weekend, Moody’s downgraded the USA sovereign rating from Aaa to Aa1. Moody’s is the last to downgrade the USA and now the US is no longer AAA-rated by any agency. While many might call for stocks to fall on this (and yields to rise), we believe this rating downgrade is largely a non-event. And if there is any stock weakness, we would be buying this dip aggressively:

• The ratings downgrades of USA are as follows:
  – S&P: 8/5/2011 AAA to AA+
  – Fitch: 8/1/2023 AAA to AA+
  – Moody’s: 5/16/2025 Aaa to Aa1
• You may wonder why we do not see this being a sizable negative for the US. Foremost, we expect this to have little impact on yields. There is no “surprise” here as Moody’s is citing facts we already know, the sizable US deficit. And we doubt any major fixed income manager is surprised. There is simply no incremental information here.
• Besides a bad headline, I just don’t see how this changes anything for the US debt picture, nor what the White House plans. So, I am inclined to view this as a non-event.
  – Corporate cost of debt will be largely unchanged
  – Corporate EPS visibility largely unchanged
  – Demand by consumers will be largely unchanged
  – Bears will want stocks to fall… that is only incremental
• As we stated last week, we believe pullbacks will be shallow anyways. Our conversations with clients show many were defensive/underinvested since April lows. And thus, they are looking to increase exposure to stocks. And we cite the 5 reasons again investors got caught offsides:
  – many believed recession coming = sell USA equities
  – many saw Supply chain hit = short US cyclicals & small-caps
  – many forced to sell due to VIX surge = institutions forced to de-risk
  – many saw End of “US exceptionalism” = sell USA, buy Europe
  – many wanted to fade retail as Retail “bought the dip” = hedge funds short retail

• As for macro events, it’s a quiet week until Thursday. Here are the main events:
  – 5/19 Mon 9:00 AM ET: May M Manheim Used Vehicle Index
  – 5/22 Thu: May Super Granny Market Update Webinar  
  – 5/22 Thu 8:30 AM ET: Apr Chicago Fed Nat Activity Index   
  – 5/22 Thu 9:45 AM ET: May P S&P Global Manufacturing PMI    49.8e
  – 5/22 Thu 9:45 AM ET: May P S&P Global Services PMI    51.1e
  – 5/22 Thu 10:00 AM ET: Apr Existing Home Sales    4me
  – 5/22 Thu 11:00 AM ET: May Kansas City Fed Manufacturing Survey   
  – 5/23 Fri 10:00 AM ET: Apr New Home Sales    690ke
• Last week was the first week that felt “normal” as there was no tariff headlines to buffet markets. And we believe stocks, while overbought, have an attractive risk reward.
• The Atlanta Fed is hosting its 2025 conference, so there is a lot of Fed speak this week:
  – 5/18-5/21: Fed Bank of Atlanta’s 2025 Financial Markets Conference
  – 5/19 Mon 8:30 AM ET: Bostic Gives Opening Remarks   
  – 5/19 Mon 8:45 AM ET: Jefferson Gives Keynote, Bostic Moderates    
  – 5/19 Mon 8:45 AM ET: Williams Speaks in Moderated Discussion      
  – 5/19 Mon 1:15 PM ET: Logan Gives Remarks, Moderates Panel     
  – 5/19 Mon 1:30 PM ET: Kashkari Participates in Q&A     
  – 5/19 Mon 2:45 PM ET: Bostic on Bloomberg TV   
  – 5/20 Tue 9:00 AM ET: Bostic Gives Opening Remarks   
  – 5/20 Tue 9:00 AM ET: Barkin Gives Speech at Richmond Fed Conference     
  – 5/20 Tue 9:30 AM ET: Collins Hosts Fed Listens Event in New Hampshire      
  – 5/20 Tue 1:00 PM ET: Musalem Speaks on Economy, Policy      
  – 5/20 Tue 5:00 PM ET: Kugler Gives Commencement Address      
  – 5/20 Tue 7:00 PM ET: Hammack, Daly Give Keynote, Bostic Moderates   
  – 5/21 Wed 12:15 PM ET: Barkin, Bowman Participate in Fed Listens   
  – 5/22 Thu 2:00 PM ET: Williams Gives Keynote Remarks      
  – 5/23 Fri 12:00 PM ET: Cook Gives Speech on Financial Stability      

BOTTOM LINE: We think pullbacks will be shallow

As we stated early last week, we believe the risk/reward for stocks is better now than it was in Feb 2025 (at prior highs). We realize stocks are somewhat overbought.

• thus, we expect some profit taking
• but we see dips as shallow, because so many are under-invested

As for why stocks are in better shape now, versus Feb 2025. Consider the following:

• We have Visibility on tariff = risks far lower
• And 2026 incrementally better visibility:
  – Tax cuts/ – De-regulation
  – More Fed cuts in in 2026
  – US cos see upside in “free-er trade”
• Moreover, US companies “battle tested” having survived the 5th major stress test:
  – COVID (2020)
  – Bull-whip supply chain shock (2021)
  – Inflation surge (2022)
  – Fastest rate hike in history (2022)
  – Tariff is latest gauntlet
• With these 5 tests, we would argue that equity risk premia should be falling, and thus, should support rising P/E. That is, P/E should be rising into year-end, not falling.
• Yet, sentiment shockingly cautious = contrarian bullish
  – Trump “put” alive and well = our staunch argument
• Bottom line, as we stated above, P/E should be rising into year-end 2025

As for the sectors we would own/overweight:

• Washed out stocks

• MAG7 & Bitcoin

• Industrials

• Financials: Large-cap and regional banks

• Small-caps

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Key Incoming Data May:

• 5/1 9:45 AM ET: Apr F S&P Global Manufacturing PMI Tame
• 5/1 10:00 AM ET: Apr ISM Manufacturing PMI Tame
• 5/2 8:30 AM ET: Apr Non-Farm Payrolls Tame
• 5/2 10:00 AM ET: Mar F Durable Goods Orders MoM Tame
• 5/5 9:45 AM ET: Apr F S&P Global Services PMI Tame
• 5/5 10:00 AM ET: Apr ISM Services PMI Tame
• 5/6 8:30 AM ET: Mar Trade Balance Tame
• 5/7 9:00 AM ET: Apr F Manheim Used Vehicle Index Hot
• 5/7 2:00 PM ET: May FOMC Decision Mixed
• 5/8 8:30 AM ET: 1Q P Unit Labor Costs Tame
• 5/8 8:30 AM ET: 1Q P Non-Farm Productivity QoQ Tame
• 5/8 11:00 AM ET: Apr NY Fed 1yr Inf Exp Mixed
• 5/13 6:00 AM ET: Apr Small Business Optimism Survey Tame
• 5/13 8:30 AM ET: Apr Core CPI MoM Tame
• 5/15 8:30 AM ET: May Philly Fed Business Outlook Tame
• 5/15 8:30 AM ET: Apr Core PPI MoM Tame
• 5/15 8:30 AM ET: May Empire Manufacturing Survey Tame
• 5/15 8:30 AM ET: Apr Retail Sales Tame
• 5/15 10:00 AM ET: May NAHB Housing Market Index Tame
• 5/16 10:00 AM ET: May P U. Mich. Sentiment and Inflation Expectation Hot
• 5/16 4:00 PM ET: Mar Net TIC Flows Tame
• 5/19 9:00 AM ET: May M Manheim Used Vehicle Index
• 5/22 8:30 AM ET: Apr Chicago Fed Nat Activity Index
• 5/22 9:45 AM ET: May P S&P Global Services PMI
• 5/22 9:45 AM ET: May P S&P Global Manufacturing PMI
• 5/22 10:00 AM ET: Apr Existing Home Sales
• 5/22 11:00 AM ET: May Kansas City Fed Manufacturing Survey
• 5/23 10:00 AM ET: Apr New Home Sales
• 5/27 8:30 AM ET: Apr P Durable Goods Orders MoM
• 5/27 9:00 AM ET: Mar S&P CoreLogic CS home price
• 5/27 10:00 AM ET: May Conference Board Consumer Confidence
• 5/27 10:30 AM ET: May Dallas Fed Manuf. Activity Survey
• 5/28 10:00 AM ET: May Richmond Fed Manufacturing Survey
• 5/28 2:00 PM ET: May FOMC Meeting Minutes
• 5/29 8:30 AM ET: 1Q S GDP QoQ
• 5/30 8:30 AM ET: Apr Core PCE Deflator MoM
• 5/30 10:00 AM ET: May F U. Mich. Sentiment and Inflation Expectation

Economic Data Performance Tracker 2025:

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: