While stocks managed to bounce back from early losses the first day after Moody’s downgrade of U.S. sovereign credit—bringing it in line with previous actions by Standard & Poor’s (2011) and Fitch (2023)—we understand that the decision raises concern about America’s fiscal health. But as history has shown, these downgrades have hardly been lasting impediments to long-term equity market gains. For investors with a steady hand and a long-term perspective, the evidence continues to favor staying the course.
The rationale from Moody’s echoed familiar concerns: persistent large fiscal deficits, rising entitlement spending and limited political will to rein in debt. They warned of deteriorating fiscal performance relative to other highly rated sovereigns. But they also reaffirmed America’s “exceptional credit strengths,” including the resilience of the U.S. economy and the global primacy of the dollar.
These warnings are not without merit. But similar alarms have sounded before. S&P’s 2011 downgrade came during a bitter debt-ceiling impasse. At the time, headlines predicted doom. Yet over the subsequent five years, the S&P 500 nearly doubled. When Fitch followed suit in August 2023, Warren Buffett responded by buying $10 billion in U.S. Treasurys—reiterating his belief in the enduring strength of the American financial system.
Jamie Dimon on Prior Rating Agency Downgrades
JPMorgan Chase CEO Jamie Dimon, too, has long downplayed the significance of such ratings actions, most recently calling Fitch’s downgrade “not that material” and reiterating that “the U.S. has the best financial system in the world.” He echoed similar sentiments in 2011, when he noted the fundamental strength of the U.S. economy remained intact despite the S&P cut.
For those who panic at the first sign of turmoil, it’s important to remember that volatility is the price of admission for long-term equity returns. Since The Prudent Speculator launched in 1977, the S&P 500 has endured 39 corrections of 10% or more and 40 rallies of similar magnitude. The average gain during these rallies has exceeded 40%, while setbacks have averaged an 18% decline. The secret to success in stocks is not getting scared out of them.
Indeed, the latest consumer sentiment data shows Main Street pessimism nearing levels last seen during the Great Financial Crisis and the COVID-19 collapse. Yet those moments marked historic buying opportunities. The University of Michigan’s sentiment index dropped to 50.8 in May, with inflation expectations ticking higher. But such pessimism has often served as a contrarian indicator—when fear peaks, value emerges.
Many Economic Numbers Still Solid
Meanwhile, April’s inflation readings came in below expectations, and the Atlanta Fed projects 2.4% real GDP growth for Q2 2025. While that’s not gangbuster growth, it defies claims of imminent recession. The labor market remains strong, and interest rates, while higher than recent norms, are still historically accommodative for equities.
Yes, debt matters. But no, these downgrades haven’t derailed America’s growth story yet. Stocks remain reasonably valued, especially among dividend payers and value-oriented names. We continue to sleep well at night knowing our portfolios emphasize cash-generating businesses with sound fundamentals and generous dividend yields.
The headlines may be grim, but history is generous to those who stay invested. As Mr. Buffett quipped, “If you’re lucky enough to be born in the United States, you’ve already won the lottery.” That remains true—even in the wake of another downgrade.
For those who like what I have to say in this forum, further market analytics and stock picks can be found in my newsletter, The Prudent Speculator.
Disclosure: Please note that shares of the stocks mentioned are owned by asset management clients of Kovitz Investment Group Partners, LLC, a SEC registered investment adviser. For a list of stock recommendations like these made in The Prudent Speculator, visit theprudentspeculator.com.
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