To The Moon

If we have noticed how the stock market have traded yesterday (Monday, 19 May) after the weekend AAA credit rating downgrades by Moody, there have been news report that investors have “saved” the stock market from this AAA turmoil.

So the next question in investors mind would be can this current rally last, but I tell you it will be complex, especially in light of recent credit rating actions.

Have Investors Saved the Stock Market from AAA Turmoil?

It is more accurate to say that investor sentiment and the broader market's reaction have largely shrugged off recent AAA credit rating downgrades rather than "saved" the market from turmoil.

Let us delve in the reasons why the above statement stand

Market Pricing: When rating agencies like S&P, Fitch, and most recently, Moody's, downgrade U.S. sovereign debt, it's often because the market has already priced in the underlying fiscal concerns. Investors are aware of the rising national debt, interest payments, and ongoing political gridlock that prevent meaningful fiscal reform. The downgrades serve more as a confirmation of these known issues rather than a sudden, shocking revelation.

Lack of Alternative Safe Havens: Despite the downgrades, U.S. Treasuries remain the largest, most liquid, and widely trusted government debt market in the world. Global investors, including central banks, still view them as the primary "risk-free" asset. There simply isn't another market that can absorb the same volume of capital with comparable liquidity and safety. This sustained demand for U.S. debt prevents a dramatic collapse in its value.

Focus on Other Fundamentals: Equity investors, in particular, tend to focus more on corporate earnings, economic growth, and the outlook for interest rates. While a credit downgrade can cause short-term jitters and volatility (as seen with the recent Moody's downgrade causing a slight dip in futures), it hasn't historically led to a sustained bear market in equities unless accompanied by other systemic shocks or a significant deterioration in corporate fundamentals.

Historical Precedent: The S&P downgrade in 2011 and the Fitch downgrade in 2023 also led to initial market turbulence, but the U.S. stock market rebounded relatively quickly. This history has likely conditioned investors to see these downgrades as headline risks rather than fundamental game-changers for the equity market.

SPY and QQQ Putting Another Green Day

Both SPY and QQQ put in another green day despite the negative headline coming on last Friday (16 May) after the market close. Moody is cutting America's pristine credit rating citing the rising debt, so they dropped them down one notch.

This follows what happened to their peers earlier in 2023, where we saw Fitch cutting their rating from AAA to AA plus. And back in 2011, Standard and Poors S&P Global also did the same thing cutting the U.S. debt level from AAA to AA plus.

Moody's credit rating stands at AA1 which on a common scale is roughly still an AA plus as measured by their peers.

And the markets did take them in stride at least in terms of the equity portion.

But when we discuss about debt downgrades it increases the risk on a certain debt, this normally translates to risk premium in terms of yields.

So as a result, we saw the 10-year and 20-year yields have a slight uptick on Monday, but not significant enough, so I think we should continue to monitor as things continues to unfold.

Can This Rally Really Last?

The sustainability of the current stock market rally is a subject of ongoing debate among analysts. Several factors influence its longevity:

Factors Supporting the Rally

Strong Corporate Earnings: Many companies, particularly in the tech sector (like NVIDIA), are reporting robust earnings growth, driven by innovation (especially AI) and strong demand. This fundamental strength can underpin stock prices.

Here are some AI-related companies that have reported strong Q1 2025 earnings

$Meta Platforms, Inc.(META)$ : Reported strong Q1 2025 results on April 30, 2025.

Revenue: $42.31 billion, up 16% year-over-year. Net Income: $16.64 billion, up 35% year-over-year. Diluted EPS: $6.43, up 37% year-over-year.

Key takeaway: Meta's strong performance was driven by robust advertising revenue, with AI playing a significant role in their ad targeting and efficiency improvements. They also increased their full-year capital expenditure outlook, signaling continued heavy investment in AI infrastructure.

Alphabet ( $Alphabet(GOOGL)$ ): Also reported strong Q1 2025 earnings on April 24, 2025. While specific detailed numbers for the entire earnings report are not immediately available without direct access to their Q1 2025 filing, the general sentiment and market reaction indicated a strong performance. Key takeaway: Google Cloud's continued growth, driven by AI services, is a significant contributor. Alphabet is heavily integrating AI across all its products and services, which is a major focus for investors.

$Amazon.com(AMZN)$ : Reported strong Q1 2025 earnings on May 2, 2025.

Key takeaway: Amazon Web Services (AWS), their cloud computing arm, is a major driver of their AI revenue. AWS continues to see strong demand for its AI infrastructure and services, which directly contributes to Amazon's overall profitability. Their e-commerce and advertising segments also leverage AI extensively for efficiency and targeting.

$CoreWeave, Inc.(CRWV)$ : Reported strong Q1 2025 results on May 14, 2025. Revenue: $981.6 million, up 420% year-over-year.

Key takeaway: CoreWeave, an AI Hyperscaler specializing in cloud platforms for accelerated computing, saw massive revenue growth driven by accelerating demand for its purpose-built AI platform. They also secured a major strategic deal with OpenAI.

$Pony AI Inc(PONY)$ : Reported Q1 2025 results on May 20, 2025.

Total Revenue: $14.0 million, up 11.6% year-over-year. Robotaxi Services Revenue: Up 200% year-over-year, with an 800% increase in fare-charging revenue. Key takeaway: While a smaller company, Pony.ai showed significant growth in its autonomous mobility business, particularly in Robotaxi services, demonstrating commercial traction for its AI-powered autonomous driving systems. They also highlighted a 70% reduction in bill-of-materials costs for their Gen 7 autonomous driving system.

AI Enthusiasm: The excitement around Artificial Intelligence continues to be a significant tailwind, driving investment and revenue growth in companies at the forefront of this technology. This is seen as a potential productivity boom similar to the internet's impact in the late 1990s.

Resilient U.S. Economy: Despite some headwinds, the U.S. economy has shown resilience, with relatively low unemployment and continued consumer spending.

Potential for Interest Rate Cuts: While the exact timing and number of rate cuts by the Federal Reserve are uncertain, expectations for eventual easing of monetary policy can provide a favorable environment for equities by making borrowing cheaper and increasing valuations.

Demographic Trends: The U.S. has a younger demographic profile compared to many other developed nations, with millennials entering their peak earning and investing years, which could support market participation.

Factors That Could Halt or Reverse the Rally

Elevated Valuations: After significant gains, many stocks, especially in the technology sector, are trading at high valuations (e.g., elevated forward P/E multiples). This leaves less room for error and makes the market more vulnerable to negative news or earnings disappointments.

Persistent Inflation and "Higher-for-Longer" Rates: If inflation proves more stubborn than anticipated, forcing the Federal Reserve to maintain higher interest rates for longer, it could negatively impact corporate profitability and make bonds more attractive relative to stocks.

Fiscal Deterioration and Debt Concerns: While investors have largely shrugged off the credit downgrades so far, the underlying fiscal issues (growing deficits, rising interest burden) remain. If these trends lead to significantly higher long-term bond yields or a loss of confidence in the U.S. government's ability to manage its finances, it could eventually weigh on the market.

Geopolitical Risks and Trade Tensions: Ongoing geopolitical instability, such as potential escalations in trade wars or conflicts, can create uncertainty, disrupt supply chains, and negatively impact global growth.

Policy Uncertainty (e.g., U.S. Elections): Major policy shifts, particularly around taxes and regulation, could impact corporate earnings and investor sentiment.

Signs of Investor Euphoria: While not yet at extreme levels, sustained aggressive retail buying and excessively positive fund flows could signal a market top, though many analysts suggest we're not there yet.

Summary

The current stock market rally is fundamentally driven by strong corporate earnings, particularly from tech and AI-related companies, and a relatively resilient U.S. economy. While investor sentiment has largely contained the impact of AAA credit downgrades, the underlying fiscal challenges are real and could become more impactful in the long term.

The rally's longevity will depend on a delicate balance: continued robust corporate earnings growth, the Federal Reserve's ability to manage inflation without stifling growth, and the absence of significant external shocks.

While a full-blown "turmoil" from credit downgrades seems unlikely given market dynamics, the risk of a correction or a period of more muted gains due to high valuations and persistent economic or geopolitical uncertainties remains. Diversification and careful stock selection remain key for investors.

The overall trend for companies heavily invested in AI, especially those providing foundational infrastructure or services (like cloud computing, specialized chips, or AI-powered solutions), has been strong earnings performance in Q1 2025, driven by the continued surge in demand for AI capabilities.

Appreciate if you could share your thoughts in the comment section whether you think the rally would be continued with strong AI and tech stocks performance.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.