Downgrade
America was stripped of its perfect credit rating, but stocks moved on as if nothing had happened. Investors might be paying closer attention to these broker downgrades instead.
Moody’s downgraded the U.S. credit rating from its highest Aaa rating to Aa1. It’s a historic first for all three major rating agencies to score U.S. debt below the top level. Why? The US$36t in national debt is a scary figure, and now there’s real concern about the government's ability to address it.
Trump’s ‘Big, Beautiful Bill’ doesn’t make things any easier. Some experts estimate that its massive tax cuts and other measures could add another US$2.5t to the fiscal deficit.
‘Who cares?’ was the response Treasury Secretary Bessent had when asked about the downgrade, saying that Qatar, Saudi and UAE were still pushing money into the economy.
The bond market was jittery nonetheless, with the 10Y and 30Y Treasury yields rising. This often signals a shift to higher mortgage rates and borrowing costs – something that could ultimately hurt stocks trading at higher valuations.
Indeed, the last two credit downgrades were bad news for tech stocks. But this time seems different. Portfolio favourites like the Magnificent Seven only dipped briefly before rebounding. The stocks that moved the most seem to have been more impacted by individual downgrades from brokers.
For instance, Reddit ($RDDT) shed 5% last Monday after an analyst downgrade from Wells Fargo ($WFC). The broker said Alphabet’s ($GOOGL) AI search could mark the ‘beginning of the end’ for Reddit. The reasoning being: if users have direct, summarised answers within search results, why would they click on a third-party website like Reddit?
Meanwhile, Melius Research downgraded U.S. semiconductor firm Marvell Technology ($MRVL), which has already lost 45% in share price value YTD. Analysts aren’t so bullish on the once-hot AI play after revising an initial thesis that was based on growth from custom accelerators for Amazon ($AMZN) and Microsoft ($MSFT).
Nvidia ($NVDA) commands 80% of the market for AI accelerators, but Bank of America ($BAC) hasn’t ruled out AMD ($AMD) taking some more share of the market going forward. After the two rivals won sovereign AI projects with HUMAIN (a Saudi Arabia’s Public Investment Fund subsidiary), BofA raised targets and reiterated ‘buy’ ratings for both.
Perhaps the most unexpected ratings upgrade of last week came from Morgan Stanley ($MS) on Tesla ($TSLA). Despite valuing Tesla’s core auto business at just US$75 per share – five times lower than its current trading level – the firm now has a US$410 price target on $TSLA.
That’s because Morgan Stanley doesn’t value Tesla as an EV company, saying that would be akin to valuing Amazon as solely an ‘online retailer’ or Apple ($AAPL) as a ‘seller of glowing rectangles and earbuds.’ It’s basing its thesis on the outlook for Tesla to deliver humanoid robots and autonomous driving tech – plus Elon Musk’s growing influence across sectors. ‘In many ways, we believe Tesla’s role in the ‘Muskonomy’ is more important than ever before,’ said Morgan Stanley.
At the end of the day, broker ratings can feel a bit like Rotten Tomatoes scores on your favourite finance doco: helpful for context, but they don’t always tell the full story. Though they sometimes sway box office figures, it’s wise not to base your opinions on any single review.
This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
