Something incredible happened in the United States about 14 years ago. S&P Global Ratings cut its top-tier AAA credit rating for the country in Aug 2011. The move reflected growing alarm over deepening political dysfunction and the country’s expanding debt load. More than a decade later, in August 2023, Fitch followed suit – flagging the same core issues: elevated debt, political instability, and questions around governance. Separately, also see Worried About $918 Bil U.S. Trade Deficit? Worry About This Metric More.
Since then, the situation has become more precarious – especially in 2025, we explain the triple impact of tariffs, taxes, and deportation here. Add to that an unsettled global environment, punctuated by escalating tariff tensions, and the stage may be set for yet another downgrade from credit watchdogs.
If history is any guide, the ripple effects could be swift and sweeping. [1] A downgrade combined with, [2] foreign investors’ already low confidence in the Trump administration’s scattershot economic actions would imply dwindling demand for U.S. treasuries – no longer considered safe. So what? Treasury yields would rise. In 2025 itself, the Fed faces needs to refinance over $7 trillion of debt – under this environment of low demand and high deficit. Things could get bad – to state the obvious – democrats and now many republicans aren’t exactly in sync with the Trump administration – dysfunction in Washington can lead to animosity. If things turn into a downward spiral, the U.S could actually default on its debt. Markets and S&P will swoon, the 50% drop we saw during the 2008-2009 period, will look small in comparison.
Investors should prepare for sudden, steep declines that could wipe out trillions in market capitalization. Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last seven market crashes.
But it isn’t all doom and gloom. Smart money rotates, as demand does not decline uniformly across industries. We adopt this macro-conscious approach in our High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception.
Stepping back, what are the facts that lead us to believe a rating downgrade is in the cards?
By The Numbers, The U.S. Economy Has Deteriorated Since 2011
Back in 2011, the U.S. was crawling out of the Great Recession. So many key economic indicators were understandably worse off than they are now. More specifically,
- Inflation (CPI) is currently 2.4% vs. a figure of 3% in 2011.
- Unemployment rate is at 4.2% vs. a level of 9% in 2011
- Real GDP growth for 2024 was 2.8% vs. 1.8% in 2011
But that’s only half the picture. Here are some other key economic indicators that paint a worrying picture:
- The U.S. national debt figure currently stands at $36.2 trillion. That’s a whopping 124% of the country’s GDP. In 2011, the debt figure was less than half the current figure at $14.8 trillion – roughly 95% of U.S. GDP.
- The fed funds rate is currently at 4.3% as the Federal Reserve tries to ensure a “soft landing” for the U.S. economy after inflation swelled to over 9% in mid-2022. While the current fed rate is better than the level of over 5% maintained over most of 2023 and 2024, the figure was near 0% in 2011 in response to the 2008 recession.
- The higher debt figure combined with higher interest rates mean that the U.S. is spending much more to service its debt. Nearly 4 times more. The country shelled out $230 billion in interest payments in 2011 and will be paying $952 billion in interest over 2025.
Put simply: the U.S. is a lot more indebted today than it was in 2011, and servicing that debt is a lot more expensive.
Adding Fuel to the Fire: The Ongoing Tariff War
The escalating tariff war – particularly between the U.S. and China – is a new ingredient in the mix this time around. In 2011, trade tensions were low. But the uncertainty surrounding the current tariff war has made investors wary.
Why? Because:
Tariffs = inflationary pressure = higher borrowing costs = greater fiscal strain
While President Trump’s goals of reducing the country’s trade deficit, encouraging domestic manufacturing, and pressuring other countries to lower their trade barriers should bear fruits in the long run, there will be near-term consequences everyone will have to bear.
And Trump knows this well – hence his remark: “Hang tough, it won’t be easy.”
Over the last few weeks, markets have been characterized by unusually high volatility. The benchmark S&P 500 index constituents have recorded a single-day loss of $3 trillion just as easily as a gain of $2 trillion.
Investors don’t like uncertainty. They don’t like risk – definitely not these high levels of risk. The result: Foreign institutions and investors want less U.S. stocks, U.S. bonds, and yes, U.S. dollars. As investors dump U.S. assets in favor of foreign alternatives, stocks have suffered losses, bond yields have risen, and the dollar has weakened.
This has happened in the past. Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last seven market crashes.
Political Gridlock Returns – Just Like Before
S&P’s 2011 downgrade cited “political brinksmanship” over the debt ceiling. That toxic mix is still very much alive.
Strife between the Democrats and Republicans was intense in 2011. It’s hard to argue that the Democrats’ relationship isn’t more bitter with Trump. And not to mention, there are disagreements among factions of the Republican party, too, this time around.
The ingredients for another downgrade are already in the pot – all it needs is a spark.
Once Burned, Ratings Agencies Aren’t Taking Chances
After the 2011 downgrade, S&P faced immense backlash, including a Justice Department lawsuit accusing them of misleading investors before the 2008 financial crisis. While the lawsuit was about mortgage bonds, the timing – right after the downgrade – was no coincidence.
Fitch and Moody’s stuck with AAA back then – knowing the political firestorm a downgrade could ignite. Fitch went ahead with the downgrade under calmer economic conditions in 2023. And Moody’s has maintained its AAA rating with a negative outlook since November 2023.
Notably, in a release earlier this month, S&P Global Ratings highlighted key risks to the U.S. economy that could warrant a downgrade from the current AA+ level. And many of those risks seem to be coming to a head.
The math is getting harder for credit agencies to ignore. Another hit from any one of them isn’t unthinkable – it’s plausible. And if it happens, the ripple effect will be seen in the corporate playbook – see This $1.8 Trillion Debt Bomb Will Flip Corporate America’s Playbook.
The Signals Are Clear – Don’t Ignore Them
Markets have so far shrugged off the risks, believing America’s “full faith and credit” is untouchable. But history says otherwise – and the economic, political, and financial cracks are widening.
The real question isn’t “if” the U.S. credit rating could be downgraded again. It’s whether you’re prepared when it does. The last thing you want is for your investment portfolio to take an outsized hit when things head south. At the very least, you would like your investment to do better than the overall equity market – particularly during bad times.
The Trefis High Quality (HQ) Portfolio, that roots itself in quality that seeks reliability, predictability and compounding growth, is an option you can explore. With a collection of 30 stocks, it has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
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