US stocks took a short breather on Monday after Moody’s downgraded the US sovereign credit rating from Aaa – the highest possible – to Aa1.
Debt downgrades often weigh on bond prices, thereby pushing the related yields up significantly, which is exactly what the credit rating agency’s announcement did on Monday.
For a while, the 30-year US bond yield surpassed 5% on Monday while the 10-year yield was seen trading at north of 4.5% at one point.
Still, Fundstrat’s Tom Lee dubbed the Moody’s downgrade of US credit a “non-event” in a CNBC interview, adding investors should buy the dip in equities if one materialises in the days ahead.
Why Lee doesn’t see Moody’s downgrade as significant
Lee remains bullish on US stock primarily because the Moody’s downgrade lacked “incremental information” that could make investors meaningfully change their stance on the equities market.
Moody’s cited budget deficit for debt downgrade – but it was already talked about at length when S&P downgraded the country’s credit rating in 2011 and again when Fitch downgraded it in 2023.
“One should realise that the bond market largely priced in the fact already that the US is really not AAA anymore. So, I’d be viewing this as a buying opportunity,” Lee argued this week on “Squawk on the Street”.
Lee remains bullish as ever on Magnificent 7 stocks
The so-called “Magnificent 7” stocks were caught in the crosshairs of the rising trade tensions between the US and China this year.
But Fundstrat’s Tom Lee remains bullish as ever on the mega-cap tech stocks, expecting them to fully recover by the end of 2025.
“We think the Magnificent 7 is going to lead into year end because it’s a group that fell first, it was widely owned but it got washed out. I think the Mag 7 will reclaim its old highs,” he added in the said interview.
Investors should note that the Magnificent 7 stocks have already started clawing their way back after the White House and President Xi’s office agreed to a 90-day pause on reciprocal tariffs on each other’s products.
Lee also expects bank stocks to do well in the second half
Other than the Mag 7, Lee is positive on financials for the remainder of 2025 as well.
The market veteran sees multiple expansion for the US bank stocks in the months ahead.
Fundstrat’s head of research is bullish on financial services behemoths partly because they showed resilience during the Fed’s rate hike cycle as well as the recent turmoil.
Additionally, “they’re kind of more tech intensive companies with better credit profiles,” he noted in the CNBC interview.
The only caveat in his constructive view on US equities is the consumer.
It must remain healthy for the stocks to retain their momentum in the back half of 2025, Lee concluded.
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