TLDR
- Moody’s downgraded U.S. credit rating, the last major agency to do so
- Morgan Stanley’s Michael Wilson sees the resulting stock selloff as a buying opportunity
- U.S.-China trade deal reduced recession risks with tariffs dropping from 145% to 30%
- 10-year bond yields exceeding 4.5% could increase stock market sensitivity to interest rates
- Wilson favors cyclical sectors like Industrials while remaining cautious on Consumer stocks
The recent selloff in U.S. stocks following Moody’s downgrade of the U.S. credit rating represents a potential buying opportunity, according to Morgan Stanley’s chief investment strategist Michael Wilson. In notes released this week, Wilson emphasized that market reactions have been driven more by interest rate fears than fundamental economic weaknesses.
Moody’s became the last of the three major U.S. rating agencies to downgrade U.S. government debt, following similar moves by S&P Global in 2011 and Fitch Ratings in 2023. The downgrade came in response to growing concerns about the U.S. budget deficit, which shows little sign of narrowing.
The news sent S&P 500 futures down 1.2% on Monday as investors processed the implications. The downgrade has raised questions about the attractiveness of U.S. assets during a period of ongoing global trade uncertainty.
Market Dynamics and Interest Rates
Wilson highlighted the close relationship between bond yields and stock performance in the current environment. “A breakout of the 10-year yield above 4.50% would take this correlation negative, and drive more rate sensitivity for equities,” he wrote.
The 10-year Treasury yield reached 4.554% following the downgrade news. According to Morgan Stanley’s analysis, historical precedent suggests such levels could lead to around 5% valuation compression in equity markets.
Despite these concerns, Wilson remains optimistic about buying potential dips. “We would be buyers of such a dip,” he stated clearly in his note to clients.
Trade Deal Brightens Outlook
A key factor in Wilson’s bullish stance is the recent trade agreement between the United States and China. The deal has reduced market volatility and substantially lowered effective tariff rates from 145% to 30%.
“We check off the first item on our list of catalysts for a more durable rally—a trade deal with China,” Morgan Stanley analysts wrote. This development has decreased recession probability and created a more favorable environment for equities.
Wilson believes markets may overlook temporary weakness in upcoming trade data because of the agreement. “The probability that the market looks through such weakness and deems it temporary just went up because of the trade agreement with China,” he explained.
The corporate earnings season also concluded without major disruptions from tariff uncertainties. This positive trend in profit upgrades supports the case for further equity gains.
Wilson’s stance places him among a minority of strategists currently favoring U.S. stocks over international markets. Earlier this year, he had warned that U.S. equity volatility would persist until the second half of 2025.
For sector-specific guidance, Morgan Stanley sees cyclical sectors like Industrials leading in revisions breadth. The firm maintains a more cautious outlook on Consumer Discretionary and Staples sectors.
Meanwhile, Goldman Sachs strategist David Kostin offered a complementary view. He expects the Magnificent Seven technology stocks to resume outperforming the broader S&P 500 index based on strong earnings trends, despite their underperformance so far this year as investors moved away from highly-valued U.S. stocks.
The benchmark U.S. stock index had been trailing international peers in 2025 and only recently recovered its year-to-date losses following the temporary trade agreement between Washington and Beijing.
The S&P 500 closed at 5,958.38 on May 16, up 0.70% for the day, showing resilience despite ongoing concerns about the U.S. fiscal outlook.
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