US stocks recovered from the Moody’s downgrade panic low

·       Moody’s downgrade was well anticipated; Wall Street got some boost on hopes of the next trade deal with Japan and India

·       Trump’s tax cut plan may add $1T public debt per year on average, even after considering some spending cuts and tariff revenue

·       Wall Street was also boosted by progress of Ukraine war ceasefire optimism after Trump-Putin’s 2 hr long telephonic conversations; Gold slips

On Friday, May 16, 2025, Wall Street closed the week in deep green on renewed hopes of Trump and Powell PUT. Trump scaled back his hawkish narrative on the China tariff, and promptly agreed to a 90-day trade & tariff war ceasefire. At the same time, Fed Chair Powell sounded less hawkish than earlier, indicating rate cuts in H2CY25, as Trump may have to continue the 10% basic universal tariff on all countries, including China, to ease a high potential supply shock for the US economy ahead of Holiday/X-Mas shopping season.

Big Tech performance was mixed, with Alphabet surging, while Meta skidded. For the week, the S&P 500 gained 5.3%, the Dow rose 3.4%, and the Nasdaq-100 surged 7%. Tech stocks rallied this week, led by Nvidia’s 16% surge on the easing of export control of its H20 AI Chips for selected Middle East countries, including Saudi Arabia; Meta rose 8%, Apple climbed 6%, and Microsoft added 3%.

On Friday, May 16, 2024, after the US spot market closed, the global rating agency Moody's downgraded the U.S. credit rating to Aa1 from Aaa, citing over a decade of rising government debt and increasing interest payments, significantly higher than other similarly rated sovereigns. Persistent large fiscal deficits, driven by increased entitlement spending and flat revenues, are expected to push the federal debt to 134% of GDP by 2035, up from 98% in 2024, with interest payments absorbing 30% of revenue. The stable outlook reflects the U.S.'s economic resilience, the dollar’s global reserve status, and strong institutional frameworks, including an independent Federal Reserve. Despite fiscal challenges, the U.S. retains exceptional credit strengths, with AAA ceilings for local- and foreign-currency debt.

Subsequently, on Monday, May 10, 2025, Wall Street futures opened the week sharply lower, with S&P 500 futures down 1.1%, Nasdaq 100 futures falling 1.5%, and Dow Jones futures shedding around 270 points. Adding to the pressure, a key congressional committee on Sunday approved President Trump’s proposed tax-cut package, which includes hundreds of billions of dollars in new, unfunded tax reductions, deepening fears over long-term fiscal sustainability.

Trump’s big & beautiful Tax Cut Bill/Legislation: President Donald Trump’s proposed tax-cut package, approved by the U.S. House Budget Committee on May 18, 2025, in a 17-16 vote, aims to extend and expand the 2017 Tax Cuts and Jobs Act (TCJA) while introducing new tax breaks, significantly impacting U.S. fiscal policy.

Details of the Tax-Cut Plan:  The tax-cut package, often referred to as Trump’s “big, beautiful bill,” combines permanent extensions of TCJA provisions with temporary new tax breaks, primarily processed through budget reconciliation to bypass Senate filibuster (requiring only a simple majority).

TCJA (2017) Extension (Permanent):

·       Individual Tax Rates: Maintains 2017 TCJA rates (10–37% brackets vs. pre-TCJA 10–39.6%). Prevents a 22% average tax hike for taxpayers ($1,695 for a family of four at $80,610 median income)

·       Standard Deduction: Keeps doubled deduction ($15,000 single, $30,000 married in 2025 vs. ~$7,500/$15,000 pre-TCJA, inflation-adjusted). Affects 91% of taxpayers

·       Child Tax Credit (CTC): Retains $2,000 per child (vs. $1,000 pre-TCJA); 40M families benefit

·       State and Local Tax (SALT) Deduction: Proposes raising or uncapping the $10,000 cap (pre-TCJA: unlimited), critical for high-tax states (e.g., NY, CA, NJ

·       Pass-Through Business Deduction: Extends 20% qualified business income deduction for S-corporations, partnerships, and sole proprietorships (26M small businesses, top rate 43.4% if expired).web:1,9,16

·       Estate Tax: Maintains higher exemption ($13.6M single, $27.2M couple in 2025 vs. $5.5M/$11M pre-TCJA). .web:3,7

·        Corporate Tax: Permanent 21% rate (vs. 35% pre-TCJA, not expiring, included for context)

New Temporary Tax Breaks (2025–2028/2029):

·       No Taxes on Tips: Exempts tip income, targeting service workers (e.g., waiters, bartenders)

·       No Taxes on Overtime Pay: Exempts overtime wages, benefiting hourly workers

·       No Taxes on Social Security Benefits: Excludes Social Security benefits from taxable income (not in House draft; alternative: $4,000 extra standard deduction for seniors). Increases Social Security’s 10-year shortfall by $2.3T, advancing insolvency to 2031

·       Child Tax Credit Expansion: Raises CTC to $2,500 per child (2025–2028, reverts to $2,000)

·       Standard Deduction Boost: Adds $1,000 (single) or $2,000 (married) to the TCJA standard deduction (2025–2029); $4,000 extra for seniors.web:13,16

·       Car Loan Interest Deduction: Up to $10,000 annually for U.S.-assembled vehicle loans (2025–2028, phases out at $100,000 single/$200,000 married income)

Other Proposals:

·       Repeal Green Energy Credits: Eliminates Inflation Reduction Act (IRA) credits for EVs, solar, and wind (saves ~$100B).

·       Retains oil/gas credits

·       Defense and Border Security: Adds $175B for border enforcement, $150B for the Pentagon, and $25B for “Golden Dome” missile defense.

·       IRS Enforcement Cuts: 20% staff reduction, targeting tax evasion enforcement, increasing deficits by $160B over 10 years

Potential Fiscal Impact:

·       Cost: $4–5.8T over 10 years (2025–2034)

·       House plan: $4.5T tax cuts, $1.5–2T spending cuts

·       Senate: $5T tax cuts, $4B minimum cuts

·       Penn Wharton estimates a $4.9–5.1T deficit increase (sunsetting by 2033)

·       Permanent extension raises deficits by $ 7.7 T.

·       Joint Committee on Taxation: $4.1T revenue loss (conventional, before interest

·       Offsets: $1.5–2T spending cuts targeting Medicaid ($880B), SNAP ($560B), education, and IRA funds ($27B EPA grants). Tariffs (28%, $157.4B revenue) may offset ~$1T, but declining imports could reduce yield.

·       Economic growth (projected 0.5–1% GDP boost) is insufficient to cover costs

·       Debt Impact: Adds $4.9–5.7T

·       Requires $4–5T debt ceiling increase (summer 2025 deadline)

Tax Cut Benefit Distributional Effects:

·       Winners: The top 5% (>$450,000) gain 45–56% of tax cut value ($54,190 average for millionaires).

·       Bottom 80% receive 29%;

·       High-tax state residents benefit from SALT uncapping

·       Losers: Low-income households face reduced Medicaid/SNAP benefits, offsetting tax gains.; bottom 40% see

Income declines with safety net cuts:

·       TCJA benefits were proportional but dollar-heavy to high earners (the top 1% pay 40% of income taxes)

·       Democrats argue cuts favor the wealthy; Republicans emphasize relief for working families

Economic Effects:

·       Growth: Modest GDP boost (0.5–1% by 2034) from lower taxes, insufficient to offset the revenue loss.

·       TCJA’s 2017 growth claims (3%) were overstated (actual: ~2.5%)

·       Inflation:  Higher Tariffs raise consumer prices (e.g., $7,400 for cars, prior response), compounding spending cut impacts on low-income households

·       Labor: Tip/overtime exemptions may boost service/hourly worker income (bottom of the pyramid), but complicate tax administration

Probability of Passing House and Senate: The tax-cut package’s passage depends on Republican unity, reconciliation constraints, fiscal hawk concerns, and Democratic opposition, with slim GOP majorities (House: 220-213, Senate: 53-47) creating tight margins.

House of Representatives: 80% probability of a smooth passage with some modifications

The House Budget Committee approved the plan on May 18, 2025 (17-16), after initial blockage by four hardline conservatives demanding deeper spending cuts ($2T vs. $1.5T). House passed a budget resolution on April 10, 2025 (216-214), setting a $4.5T tax cut cap with $1.7T spending cuts. A full floor vote is planned before May 22, 2025. The GOP Control of a 220-213 majority allows passage with minimal defections (max 3 without Democratic support). Trump’s endorsement and Speaker Mike Johnson’s negotiations (e.g., with fiscal hawks) secured conservative votes. Trump’s influence and reconciliation ease passage, but fiscal hawk dissent and SALT disagreements require concessions (e.g., scaled-back SALT cap increase to $30,000).

Senate Status: 65% probability of a smooth passage with some modifications

Senate passed a budget resolution on April 5, 2025 (51-48), allowing $5T tax cuts and $5T debt ceiling increase, with $4B minimum spending cuts. The Senate Finance Committee is drafting its version, needing alignment with the House by July 4, 2025, per Trump’s goal. Senate’s GOP majority and reconciliation favor passage, but moderate defections (Collins, Paul), House-Senate differences, and economic uncertainty (tariffs, debt) lower the odds.

Overall Probability of Becoming Law: 70%

The House and Senate must merge their budget resolutions and pass identical bills via reconciliation. House aims for a vote by May 22-26, 2025; Senate targets July 4. Trump’s signature is assured if passed. Debt ceiling increase (summer 2025) adds urgency. As of May 18, 2025, Trump’s tax cut bill advanced significantly by winning approval from the House Budget Committee, overcoming earlier Republican dissent. However, there is no assurance that it was fully passed into law by Congress. The bill was poised for further consideration in the House, with a potential vote planned before May 22-26, 2025, and subsequent Senate review targeted for completion by the July Fourth recess.

Moody’s downgraded the U.S. credit rating from AAA to AA1 on May 16, 2025, citing rising government debt, increasing interest payments, and persistent fiscal deficits. The agency highlighted a lack of effective measures from successive administrations to address these issues, projecting federal debt to reach 134% of GDP by 2035. This downgrade stripped the U.S. of its last top-tier credit rating, following earlier downgrades by S&P in 2011 and Fitch in 2023.

On Monday, April 19, Trump congratulated Republicans for approving his big & beautiful legislation of tax cuts extension in the House Finance Committee: “CONGRATULATIONS REPUBLICANS!!! MAKE AMERICA GREAT AGAIN!!!”

Trump Administration’s Response:

White House (via Steven Cheung): The White House criticized the downgrade as politically motivated, targeting Moody’s Analytics economist Mark Zandi, accusing him of being a long-time critic of Trump’s policies. Cheung noted that Zandi, who advised Obama and donated to Clinton, is not part of Moody’s Ratings, a separate entity. The administration blamed the Biden administration’s spending for the fiscal issues, claiming Trump’s team is focused on “slashing waste, fraud, and abuse” through initiatives like the Department of Government Efficiency and passing a major tax and spending bill.

Treasury Secretary Scott Bessent:

Bessent dismissed Moody’s downgrade as a “lagging indicator” and irrelevant during an NBC “Meet the Press” interview on May 18, 2025. He argued it reflected Biden-era spending rather than Trump’s current policies, emphasizing that Trump’s economic plan, centered on tax cuts and tariffs, would drive growth to outpace debt. Bessent also downplayed the downgrade’s significance by noting that nations like Qatar, Saudi Arabia, and the UAE, which made investment commitments during Trump’s recent Middle East trip, were unconcerned by the rating cut.

Political Reactions:

The Moody downgrade coincided with Republican efforts to pass a tax bill extending Trump’s 2017 tax cuts, which nonpartisan analysts estimate could add $3-5 trillion to the debt over a decade. Hardline Republicans blocked the bill in the House Budget Committee on May 16, seeking deeper spending cuts, though it later advanced on May 18. Democrat Senate Leader Chuck Schumer called the downgrade a “wake-up call” for Republicans to curb “deficit-busting” tax cuts, while some Republican savvy economists, like Stephen Moore, labeled Moody’s action “outrageous” and politically driven. Overall, the Trump administration framed the downgrade as a reflection of past policies and expressed confidence in their economic strategy, while critics used it to highlight fiscal irresponsibility.

On Monday, May 19, 2025, Trump was busy with Putin for over 60 minutes of telephone discussions on Ukraine's war ceasefire. Trump posted a long Truth: 

“Just completed my two-hour call with President Vladimir Putin of Russia. I believe it went very well. Russia and Ukraine will immediately start negotiations toward a Ceasefire and, more importantly, an END to the War. The conditions for that will be negotiated between the two parties, as it can only be, because they know the details of a negotiation that nobody else would be aware of. The tone and spirit of the conversation were excellent. If it wasn’t, I would say so now, rather than later.

Russia wants to do large-scale TRADE with the United States when this catastrophic “bloodbath” is over, and I agree. There is a tremendous opportunity for Russia to create massive amounts of jobs and wealth. Its potential is UNLIMITED. Likewise, Ukraine can be a great beneficiary of Trade, in the process of rebuilding its Country. Negotiations between Russia and Ukraine will begin immediately. I have so informed President Volodymyr Zelenskyy, of Ukraine, Ursula von der Leyen, President of the European Commission, President Emmanuel Macron, of France, Prime Minister Giorgia Meloni, of Italy, Chancellor Friedrich Merz, of Germany, and President Alexander Stubb, of Finland, during a call with me, immediately after the call with President Putin. The Vatican, as represented by the Pope, has stated that it would be very interested in hosting the negotiations. Let the process begin!”

Later, Trump said in his regular media briefings:

·       US not stepping back from Russia-Ukraine talks

·       Russia-Ukraine talks at the Vatican would be beneficial

·       Let us get this thing going

·       I am just here to try and help

·       If something does not occur, I will back away

·       Of course, I asked Putin to meet with me

·       I asked Putin when we are going to end this

·       Spoke for a while with European leaders today

·       Europe is facing a significant issue

·       No boots on the ground, and we would not

·       This is for someone else

·       My entire life is one significant transaction

·       Informs Putin that it is time to cease this action

·       I think Putin aims to halt the war

·       Red Line Not Announced

·       I have a certain boundary

·       I don't want to reveal what that line is

·       I have a red line, but I won't comment on it

·       Putin wants to end the conflict

·       Time for sanctions could occur

·       Biden's cancer diagnosis is very sad

·       I'll tell you in 2 weeks

·       Zelenskyy Strong Leader

·       Possible time for sanctions to occur

·       Sanctions on Russia could exacerbate the situation

·       Think Zelenskyy aims to halt

·       Zelenskyy is challenging to work with

China Commerce Ministry on the US statement on Huawei chips:

·       We urge the US to stop discriminatory actions towards China.

·       China will take firm steps to protect its rights if the US insists on damaging Chinese interests.

·       China will take firm steps to protect its rights if the US insists on damaging Chinese interests.

·       The US undermines the consensus reached in the Geneva talks.

WH Sr. Adviser Hassett:

·       I would not be surprised if there are more trade deals this week

·       We'll keep a close eye on what the Chinese have agreed to

·       The economy will continue to take off

·       American bonds are the best buy

·       Moody's downgrade should not be a surprise to markets

·       Moody's decision is backward-looking

·       15 countries are close to a trade deal

·       The debt ceiling will go up with the big, beautiful bill

·       US debt is the safest bet on earth

·       The economy will continue to take off

The WH Press Sec. Leavitt:

·       The tax bill is one step closer to passage

·       Every Republican in the House and Senate must unite behind a reconciliation bill

·       The US undermines the consensus reached in the Geneva talks.

·       China asks the US to correct wrongdoings

·       China vows to take measures if the US insists on going its way

·       The tax bill to fund the rest of the border wall.

·       Trump will call Zelenskyy when Putin's call concludes

·       We will hear from Trump or the White House after calls

·       Trump is open to meeting Putin. Everything is on the table, including secondary sanctions

·       On Moody's downgrade: The world has confidence in the US

·       Trump disagrees with Moody's assessment

·       Trump held direct talks with US House Speaker Johnson over the weekend and will continue to be engaged with the House and the Senate.

Market Impact of US rating downgrade by Moody’s

Usually, such a downgrade is negative for USD, US bonds (USTs), and US stocks, while positive for Gold, US bond yields, and major global currencies (like EURUSD, GBPUSD). However, the market was long expecting such a downgrade amid the concern of Trumpcession after Trump launched his tariff war on April 2, 2025. Thus, the overall impact should be limited. And rating agencies are also late most of the time in taking timely rating action.

The US Federal interest on public debt is steadily rising from around 9% in FY18 to almost 18% now in FY24. But it was not a big issue for most of the US policymakers, including former US Treasury Secretary Yellen in the Biden administration. Yellen was of the view that the nominal US interest on public debt is only around 2% of US nominal GDP. But the real issue is not here about debt to GDP or debt interest to GDP ratio; it’s all about the theoretical debt interest to revenue ratio, and if such a trend continues, the US has to take debt to pay the interest, which is a symbol of bankruptcy.

Another issue is that the USD is being steadily devalued due to rising M2 (money supply) at an alarming rate after COVID to fund helicopter money (fiscal and monetary stimulus), most of which was utilized as direct grants rather than infrastructure spending. China and even India spend most of the fiscal stimulus on infrastructure. China invests heavily in transport and industrial infrastructure development rather than too much dole money or Rabin hood politics. Trump should take a lesson from China’s development model and try to compete in a fair way rather than creating an environment of cold, tech, and trade war. China is in a better position of strength to win this long war of attrition on trade; the US has to reset completely to compete with mighty China, irrespective of any Trump narrative.

On Monday, May 19, 2025, Wall Street Futures recovered from Moody’s US downgrade panic low as it was already discounted by the market, and the Trump admin also ignored it. Wall Street was also undercut briefly by China’s warning to the US about the Huawei Chip restriction. But eventually got some boost in hopes of the next trade deal with Japan and India after a report. Wall Street was also boosted by the progress of the Ukraine war ceasefire optimism after Trump-Putin’s 2 hr long telephonic conversations; Gold slips.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 41400) now has to sustain over 41800 for a further rally towards 42000/42500-43000/43300* and 43500*, and even 44600-45200 in the coming days; otherwise sustaining below 41700, DJ-30 may again fall to 41000/40600-4010039900 and 39700/38600-38000/37700-37300/37000 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20800 for a further rally to 21100/21400-21700*/22000* and 22400-22600 in the coming days; otherwise, sustaining below 20750/20600-20500/20400, NQ-100 may again fall to 20000/19600-19400/19200 and 19100/18800-18600/18000-17600/16400 and 16200-15800 in the coming days.

Also, technically Gold (CMP: 3240) has to sustain over 3275-3300 for any recovery to 3325/3375* and 3400/3425-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3290-3275, Gold may again fall to 3255/3225-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.