Jacobo Taurel

Moody’s has lowered the U.S. credit rating to Aa1, citing the ongoing rise in public debt and the increasing cost of servicing that debt in today’s high-rate environment. This move means the U.S. has officially lost its last AAA rating, after similar downgrades by S&P in 2011 and Fitch in 2023. 

While the news highlights growing fiscal concerns, it’s not entirely unexpected: the federal deficit now exceeds $2 trillion per year, and interest payments already absorb 18% of tax revenues. 

So far, markets have reacted calmly, with a few key takeaways: 

• Rates and investments: No major sell-off of Treasury bonds is expected, though yields might rise slightly, similar to what happened after Fitch’s downgrade. If volatility spikes, the Fed could step in. 

• Equities: The impact on stock markets may be muted, since all three major rating agencies have now issued downgrades. Investors remain more focused on trade policies and tariffs. 

• Credit confidence: Despite the downgrade, the U.S. retains strong credit fundamentals, backed by a deep capital market, the dollar as the world’s reserve currency, and strong repayment capacity. 

What this means for markets: 

While the short-term impact is likely limited, persistent fiscal imbalances could pose long-term risks for financial markets. 

U.S. Federal Deficit and Net Interest Payments (% of GDP, 1973–2035) 

*TCJA refers to the Tax Cuts and Jobs Act of 2017. 

Source: JP Morgan. 

Q1 2025 ended on a strong note, despite ongoing challenges in the economic landscape.

With nearly 85% of S&P 500 companies having reported, the first-quarter earnings season for 2025 showed encouraging strength. Earnings per share (EPS) grew 12% year over year, well above expectations. But corporate commentary also reflected a more cautious tone: mentions of terms like “tariffs” and “recession” rose sharply in investor calls. While consumer spending held up, some pressure is beginning to show in industries like restaurants, airlines, and premium retail. 
On the other hand, mega-cap tech companies stood out. Their earnings grew 29% year over year (vs. 9% for the rest of the S&P 493), driven by strong AI investments. Interestingly, their valuations relative to the broader index are now at their lowest since 2017. 

Market implications: 

Q1 2025 earnings helped support the S&P 500’s rebound in April, but they reflect past performance. Expectations for the rest of the year continue to trend lower and could be revised further as economic headwinds persist. 

Q1 2025 Earnings: Double-digit growth delivered. 

Source: Goldman Sachs. 

The Federal Reserve kept rates unchanged but struck a more cautious tone.  

A Pause Amid Uncertainty  

Job Market Stays Strong, But Economic Uncertainty Tempers Expectations for Quick Changes  

As expected by markets, the Federal Reserve kept its benchmark interest rate steady at 4.25%–4.5%, a level it has maintained since December. While the labor market remains solid, with 177,000 new jobs added in April, the Fed acknowledged growing economic challenges.  

Inflation remains high, and after the GDP contraction in Q1, the Fed’s statement highlighted a rise in economic uncertainty. The Fed stressed its commitment to monitoring risks that could impact its dual mandate: keeping inflation under control and supporting employment.  

According to Jerome Powell, weaker consumer and business outlooks are largely due to an uncertain trade environment.  

Looking ahead, the Fed reiterated that it’s prepared to adjust its policy stance if needed. Following the announcement, expectations for a rate cut in June dropped significantly.  

Market Implications  

The outlook remains uncertain. While the Fed held rates steady, the lower likelihood of immediate cuts highlights the importance of closely watching the economic and trade landscape.  

Fed Funds Rate Expectations  

Source: JP Morgan

Discover how alternative assets strengthen portfolios in uncertain times. 

The strategic role of alternative investments 

In an increasingly dynamic economic environment, relying solely on traditional stocks and bonds can leave portfolios more exposed to concentration risk and market sensitivity. Alternative assets open opportunities to diversify, hedge against inflation, and enhance long-term resilience. 

How each asset class contributes: 

• Private credit: Generates attractive income with floating rates that mitigate interest rate risk. 

• Private equity: Captures innovation and growth opportunities outside the public markets. 

• Real assets (Real Estate and Infrastructure): Provide stable cash flows, inflation protection, and long-term contracts. 

• Hedge funds: Reduce volatility and deliver returns with low correlation to traditional markets. 

Rather than simply seeking exceptional returns, the focus is on complementing and strengthening the portfolio with instruments that add true stability and diversification in challenging economic contexts. 

Market implications: 
Incorporating alternative investments into traditional stock and bond portfolios can help manage risk and enhance returns. 

Risk–Return Profile of a Traditional Portfolio Including Alternative Investments (Q1 1990 – Q3 2024) 

Source: JP Morgan 

Key insights to stay focused and invest strategically in a changing environment.

Market volatility in perspective: 5 key ideas

The recent 90-day tariff pause has not eliminated uncertainty in the markets. While ups and downs continue, history reminds us that volatility is often temporary and that markets have a remarkable capacity to recover. Here are five key ideas to help maintain perspective and stay focused on your long-term goals:

1. A long-term view changes everything. Stepping back from day-to-day noise allows for better decision-making. Just like in 2018, markets can bounce back strongly—as they did in 2019.
2. Recoveries often follow declines. After a drop of more than 15%, markets have risen an average of 52% in the following 12 months. Keep the inversion is often wiser than reacting.
3. Bear markets are shorter than they seem. On average, they last 12 months compared to 67 months of bull markets. Trying to anticipate them may mean missing out on recovery opportunities.
4. Fixed income brings stability. During equity market corrections, high-quality bonds have shown their defensive role.
5. Staying invested is the best strategy. Discipline has consistently paid off. A portfolio invested in the S&P 500 over the last decade would have tripled in value despite the COVID pandemic and interest rate hikes.

Market implications: History doesn’t repeat itself. A diversified portfolio and a long-term approach remain the best tools for navigating uncertainty.

Market returns have historically been strong following significant downturns.

Source: CapitalGroup