This time is different! Moody's downgrades US credit rating, technology stocks are already used to it?

In the past few years, when the credit ratings of the United States were downgraded, the technology stock market experienced severe fluctuations. However, unlike before, the latest rating adjustment by Moody's Corporation last week does not seem to have caused a major impact on the tech stocks this year. Credit rating agency Moody's Corporation downgraded the credit rating of the US government from the highest "Aaa" to "Aa1" by one level. The main reasons were the significant increase in government debt over the past decade, and the current interest payments ratio being significantly higher than other countries of the same level. Although the rating is still high, this change caused some volatility in the market. However, market experts believe that the impact this time is much smaller than the market turmoil when Standard & Poor's first downgraded the US credit rating from AAA to AA+ in 2011. That year, institutional investors were unsure how to adjust their positions based on the rating downgrade, leading to a drastic market reaction. Charles-Henry Monchau, Chief Investment Officer of Syz Group, pointed out, "Because the market has experienced similar situations before, investors are now more calm." Data shows that on the first trading day after the downgrade of the S&P rating on August 5, 2011, the technology sector SPDR fund (XLK.US) tracking the S&P 500 tech sector plummeted by 6.2%, while the tech-heavy NASDAQ index plunged by 7.8%. Over the following month, tech stocks continued to fluctuate. When another rating agency, Fitch, downgraded the US rating on August 1, 2023, XLK fell by 2.3% the next day, with a weekly cumulative decline of about 4%; NASDAQ dropped by 2.6% the next day, with a 3% decline over the week. These two rating adjustments both caused significant short-term volatility in tech stocks. Compared to this, Moody's Corporation's downgrade this time was not surprising. As early as November 2023, the institution had already lowered the outlook for the US credit rating from "stable" to "negative", so the market was already prepared. Therefore, after the rating was announced last Friday, the market reaction was relatively mild. Although on Monday's opening, the S&P 500 index fell by 0.9% initially and the NASDAQ index dropped by 1.4%, both indices recovered from the decline and rose. XLK fell by 0.8% in early trading that day but ended up largely flat. Although the impact of this rating downgrade itself is limited, the rise in US bond yields poses a greater risk to tech stocks. On Monday, the yield on the 10-year US Treasury bond briefly touched 4.57%, and the 30-year bond yield surpassed 5%, eventually settling at 4.45% and 4.91% respectively. An increase in yields means that government bonds offer more attractive returns, weakening the attractiveness of high-growth assets like tech stocks. Even with a credit rating downgrade, government bonds are still considered "risk-free" assets, with an annual return of 4.5%-5% being more attractive compared to the uncertain future returns of tech stocks. Despite facing pressure from rising yields, tech stocks are not without their bright spots. The artificial intelligence boom is providing a "tailwind" for the tech sector, and major cloud computing service providers are planning to increase investments in AI infrastructure. Additionally, five out of the "Big Seven" tech giants, including Amazon.com, Inc. (AMZN.US), Alphabet Inc. Class C parent company Alphabet (GOOG.US, GOOGL.US), Apple Inc. (AAPL.US), Meta (META.US) and Microsoft Corporation (MSFT.US), reported impressive results in the first quarter earnings reports. Chip giant NVIDIA Corporation (NVDA.US) will also announce its earnings this week, attracting high market attention. Although many companies are being conservative in their financial forecasts, investor confidence is returning, partly due to President Trump's announcement of a temporary reduction in US-China tariffs, providing an additional boost to tech stocks. Overall, however, the performance of the "Big Seven" tech companies is still lagging behind the market. As of now, the Roundhill Magnificent Seven ETF (MAGS.US) has fallen by approximately 3.5% year-to-date. Nevertheless, in a report released by Goldman Sachs Group, Inc. on May 16, it was pointed out that based on the future profit growth expectations of the seven major tech companies, they are expected to continue outperforming the market by 2025, although the excess returns may not be as significant as in the past few years.