Moody's credit downgrade shocks the market, will the US stock market enter a new bear market? Perhaps just a "small episode" in the bull market.

Global investors may face another round of financial market volatility in the short term since the beginning of this week, undoubtedly triggered by Moody's Corporation, one of the three major international credit rating agencies, downgrading the credit rating of the US government from the highest rating of Aaa to Aa1 last Friday. This also means that US sovereign debt has been completely removed from the "highest credit rating" category by the three major credit rating agencies. After the Asian market opened on Monday, the pessimistic sentiment of "selling US assets" surged, especially after the Trump administration announced global retaliatory tariffs in early April. Asian stock markets fell across the board on Monday, and US stock index futures, US bond futures, and the US dollar index all fell together. In the short term, US stocks and global stock markets, as well as global bond markets, are in a downward adjustment due to the downgrade of the US credit rating, creating uncertainty. When the other two major credit rating agencies, Standard Pool Corporation and Fitch, announced the downgrade of the US rating, it caused global financial market turmoil in the short term as well. The focus for investors now is: will Moody's Corporation's downgrade of sovereign credit ratings lead to a drastic sell-off in US stocks, leading to a new bear market in US stocks? According to the general view of Wall Street analysts, the probability of a sharp drop in US stocks entering a bear market is very low from both a technical analysis and fundamental perspective. Cestrian Capital Research, an independent investment research company, recently stated that the CBOE Volatility Index (VIX Fear Index) is currently at near recent lows, indicating a bullish market sentiment. The organization predicts that US stocks are likely to see a mild short-term "pullback episode" and not a major downturn, followed by a potential new high in US stocks. The downgrade of US sovereign credit ratings by Moody's Corporation may serve more as an excuse or catalyst for some institutional investors to take profits, and they may choose to buy on the dip rather than be a negative catalyst for a bear market in US stocks. This rating event may even accelerate the Federal Reserve's move towards rate cuts after a brief digestion, pushing US stocks to continue to rise and reach new highs. The never-ending wave of excitement is expected to continue after a brief pause After the US lost its last highest sovereign credit rating on Friday, Moody's Corporation unexpectedly announced the downgrade of the US sovereign credit rating from Aaa to Aa1, sentiment about the US government potentially defaulting has increased. However, it is important to note that this downgrade is not a sudden catastrophic event of historical scale - both S&P and Fitch had already downgraded US credit ratings in the past few years, so Moody's Corporation's downgrade is expected to be fully priced in and digested by the market in the short term. The impact on the US economic fundamentals compared to the previous downgrades by S&P and Fitch is relatively limited. More attention should be paid to volatility indicators, market technical analysis, and US economic fundamentals. Currently, the VIX volatility index is at recent lows, hovering at rare low levels for the year, indicating that investors are still addicted to bullish sentiment. Generally, when the VIX is so low, it often means the market lacks panic selling pressure and protective bets, which excessive optimistic sentiment often appears near short-term peaks. In other words, from a volatility indicator perspective, the market may have accumulated some amount of downward pressure. Although Moody's Corporation's downgrade appears to be a major negative news from a fundamental perspective, US stocks fell after the news was announced post-market, but considering the volatility and sentiment indicators, the current pullback is more likely to be a profit-taking event for longs, a normal process of digesting strong rebound gains, and unlikely to evolve into a major sell-off like last year or the beginning of April. From a major technical perspective, the price action of representative indices such as SPY, QQQ, SOXX, which track US stock valuations, have shown technical signs of a short-term peak. According to Elliott Wave Theory's wave structure, this rally since spring can be divided into five waves progressing, and the market is likely in the late stages of the third wave and entering the fourth wave corrective stage. The technical patterns of these ETFs show signs of weakness after recent highs - likely a signal of a local top. The fourth wave correction typically appears as a mild retracement, with a relatively limited degree, helping to digest previous gains. From the perspective of technical analysis, it is crucial to note that the fourth wave is a normal correction in an uptrend, not a trend reversal. As long as the fourth wave retracement does not break key technical support levels (such as the top area of the previous wave), the overall uptrend will be maintained, and the subsequent fifth wave rise will likely push the indices to higher highs. This indicates that the current decline we see is more like a temporary pause in the US stock bull market process, rather than the beginning of a new bear market. Technical indicators also support this view: some overbought indicators are falling, but the overall technical picture remains in a key bullish control zone; trading volume has not shown signs of panic selling amplification.Elephant. All of these indicate that the market is undergoing a healthy adjustment rather than a trend reversal.From the perspective of the fundamental aspects of the US economy and the future outlook of the fundamentals, current US economic data still show strong resilience. Whether it is high-frequency consumer goods statistics, durable goods orders, or the overall consumer expenditure data that still shows strong resilience in the US, there are no clear signs of a significant slowdown or recession in the US economy. Furthermore, investment banks like Goldman Sachs Group, Inc. no longer predict that the US economy will fall into a recession in the second half of this year after significant easing of tensions in US-China trade, and have significantly raised their growth expectations for the US economy this year. In a research report released on Thursday evening, Barclays PLC Sponsored ADR (Barclays) stated that it now expects the US economy to grow by 0.5% this year, and is expected to grow by 1.6% next year, higher than the previous forecasts of -0.3% and 1.5%, respectively. This also means that Barclays' team of economists have joined the ranks of investment banks such as Goldman Sachs Group, Inc., JP Morgan, etc., no longer pessimistic about the 2025 US economy and have reduced the probability of a US economic recession, while being much more optimistic about the prospects of the US stock market. Goldman Sachs Group, Inc.'s team of economists expect the US economy to grow by 1% in 2025, an increase of 0.5 percentage points from Goldman Sachs Group, Inc.'s previous expectations, and have reduced the probability of a domestic economic recession in the next 12 months from 45% to 35%. Following the temporary trade consensus reached between China and the US within 90 days, another major Wall Street bank, JP Morgan, quickly raised its expectations for US economic growth, no longer adhering to its previous forecast of a US economic recession in 2025. The logic of the US stock market bull market has not collapsed: the correction is a chance to buy low on the Hershey Company, ready to embrace a super rally after the correction. Looking at the overall situation of the news, technical analysis, and economic fundamentals, Moody's Corporation's downgrade report is likely to be the catalyst for a short-term market correction. In recent times, US stocks have continued to rebound, with major indexes recovering from the fallout caused by the tariff policies in April and reaching new highs, accumulating significant gains for long positions. In this background, investors already have the desire to take profits and reduce risk exposure, and Moody's Corporation's downgrade provides an opportunity or "excuse" for this. In other words, the selling pressure triggered by this news is more of a direct reflection of the market's internal technical adjustment needs and short-term profit-taking by investors temporarily withdrawing some funds - rather than a significant deterioration in fundamental expectations. Therefore, independent investment research company Cestrian Capital Research believes that this downgrade has limited impact on the long-term market trend. Furthermore, this rating turmoil may also bring unexpected positive results. From a policy perspective, if the downgrade triggers further short-term market volatility and exacerbates US Treasury selling, leading to a tightening of American Financial Group, Inc.'s situation, the Federal Reserve may be forced to reconsider its monetary policy path and may consider early rate cuts and targeted expansion to stabilize market expectations. Although Federal Reserve officials have not made a clear statement on the rating event, historical experience indicates that when financial markets are shaken, monetary policy tends to become more accommodative. This means that Moody's Corporation's downgrade may accelerate the timeline for policy shifts, potentially becoming a significant catalyst for pushing the US stock market bull market even higher. After all, once investors begin to expect the Federal Reserve to ease policy, the decline in long-term interest rates and improved liquidity will support stock valuations, allowing the three major stock indices to continue their ascent after a brief consolidation. Based on the above analysis, Cestrian Capital Research is adopting a relatively cautious but still bullish strategy in its specific operations. Currently, the organization holds only a small number of short positions as insurance to hedge against short-term volatility risks - this is a very small position, equivalent to buying an "insurance policy." Overall, Cestrian Capital Research remains optimistic about the medium-term outlook for the market and has not turned bearish because of Moody's Corporation's downgrade. According to many analysts, the market, especially the stock prices of large technology giants with high valuations, which have experienced a strong rebound in April, may need a moderate profit-taking technical correction. Moody's Corporation's downgrade may provide an opportunity for this correction, and after the adjustment, it is expected to become a driver for the US stock market to reach new highs. In other words, Moody's Corporation's downgrade did not "kill" the S&P 500 index and the Nasdaq 100 index in this bull market rally, but after a short-term downward adjustment, it might inadvertently ignite a new round of strong bull market momentum for the bulls. In the eyes of bullish forces like Cestrian Capital Research, after a small fourth wave consolidation, the US stock market is expected to regain its upward momentum, and the S&P 500 index will challenge and surpass its previous historical highs.