Five for Friday - May 23, 2025
Credit Ratings, Rally Check-In, Profits, Taxes, and Road Trips
1. Ratings
Rating agency Moody’s sparked debate recently when it downgraded the U.S. credit rating to Aa1 from Aaa (i.e., to second-best from best). Ultimately the market shrugged, with the S&P 500 finishing higher on the Monday after the report was released. Previous downgrades to U.S. debt have not been good market-timing tools (to say the least), with the S&P 500 up 19% in the 12 months following S&P’s 2011 downgrade and up 21% in the 12 months following Fitch’s 2023 downgrade. The move seems mostly symbolic. A nation whose debt is denominated in a currency it issues cannot be insolvent (unlike an individual or corporation) and the U.S. remains the richest country in the world and can tax one of the largest and most productive private sectors. In fact, U.S. economic output (i.e., GDP) is more than double that of all Moody’s Aaa-rated countries combined (Australia, Canada, Denmark, etc.). The U.S. fiscal trajectory needs a remedy – that’s not new news – but investors need not overly fret about the downgrade.
2. Rally
On May 19, the S&P 500 closed ~20% above its April 8 lows. Not only was this one of the best ~6 week stretches in the last 75 years (with only 1982, 2009, and 2020 topping it), but it would also rank as one of the biggest bear market rallies in history if we were to stumble from here and re-probe the early April market lows. Put simply, it is very rarely a head fake when the stock market rallies this aggressively. Leadership is cyclical and risk-on, breadth is robust, and momentum is with the bulls. This won’t be the last period of market volatility in the coming years (or weeks) given all the various crosscurrents, but as of today, stocks are demonstrating bull market behavior and that’s good news.
3. Earnings
The ongoing trade turmoil renders first quarter economic data a little stale, but it’s worthwhile to peek into how companies started the year. Three interesting things from FactSet’s always-useful deep dive into the data: 1) Resilience. The S&P 500’s earnings growth of ~14% was almost double what analysts expected on March 31 thanks to positive revisions from 10 of 11 sectors; 2) Efficiency. Despite headwinds, the S&P 500’s net profit margin of 12.8% was above the previous quarter’s 12.6% and the 5-year average of 11.7%. A simpler metric of gross margin sits at its highest level since the turn of the century; 3) Guidance. While mentions of tariffs and uncertainty are at near-record highs, the firms that have been brave enough to give guidance for Q2 have actually been somewhat positive: the percentage issuing negative earnings guidance for Q2 2025 is 54%, which is actually below the 10-year average of 62%. Headwinds persist, but so does the profit motive that drives corporate results.
4. Taxes
Baird’s Wealth Planning team provided a comprehensive review of the recent 2025 House Tax & Budget Proposal here. While far from a final text (the Senate will have plenty to say on the topic), the bill shines a light on the legislative priorities of the current Congress. The Washington Policy team at Strategas (a Baird company) also weighed in on the developments in this macro update, noting that the business and consumer aid included should boost GDP by 1%, helping to mitigate the negative economic impacts of tariffs.
5. On this day
in 1903, Horatio Jackson set off on America’s first cross country road trip by automobile – spurred on by a $50 bar bet. Prior to the journey, many viewed cars as novelties suitable only for shorter city drives. Jackson's (eventual) success proved the car's practicality for longer-distance travel and portended a boom in personal vehicle adoption. From the Richmond Fed, “Sales of passenger cars rose from 181,000 in 1910 to 4.5 million in 1929…the rapid expansion of the auto industry created jobs throughout the country and played a large role in sustaining the prosperity of the 1920s.”
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