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What this video’s about:

In this episode of The Market Share, Chief Investment Officer Paul Gifford and Senior Portfolio Manager Erik Clapsaddle unpack the implications of the recent U.S. credit rating downgrade by Moody’s, the persistent federal deficit, and the growing burden of interest payments. They also analyze the first quarter GDP data and what it signals about the strength of the economy. How are fiscal pressures and economic fundamentals shaping market sentiment?  Let’s find out.

U.S. Credit Rating Downgrade: Why It Happened and What It Means

Moody’s recent downgrade of the U.S. credit rating from AAA to AA1 marked a historic shift—the first time since 1919 that the U.S. has not held the top rating. However, the move didn’t come as a shock to investors. The timing of the downgrade was uncertain, but the underlying conditions had already signaled this possibility.

The rationale behind the downgrade is rooted in fundamentals: rising fiscal deficits, mounting total debt, and rapidly increasing interest payments. These factors no longer align with the economic profiles of other top-rated sovereigns. While the U.S. still benefits from a large tax base and a resilient economy, Moody’s is signaling concern over long-term fiscal sustainability.

The Widening Fiscal Deficit: 23 Years and Counting

The downgrade is closely tied to America’s persistent budget imbalance. The U.S. has run a fiscal deficit for 23 consecutive years, with the gap widening significantly since 2020. The current deficit sits at around $2 trillion, underscoring the gap between government spending and revenue.

There’s widespread agreement among economists and managers alike—the U.S. government has too much debt. The size and growth of this deficit are not just financial facts; they shape investor confidence and long-term policy risks.

What’s Driving Government Spending?

A deeper dive into the federal budget reveals the challenge of controlling spending. The largest line items include Social Security, Medicare, income security programs, national defense, and now—more than ever—interest payments on the national debt.

In just two years, net interest payments ballooned from $584 billion to $945 billion—a 62% increase. That jump reflects both the growing size of the debt and higher interest rates. Interest on the debt is growing faster than nearly every other spending category, and that’s deeply concerning.

Debt-to-GDP: A Growing Drag on Growth

The U.S. debt-to-GDP ratio currently stands at about 130%, more than double the ideal 60%. Historically, ratios above 80% begin to hinder economic growth. While the economy has shown resilience, this level of debt raises serious long-term concerns.

The only recent exception was 2021, when pandemic-era stimulus led to a brief period in which economic growth outpaced debt growth. Since then, that trend has reversed, and the gap continues to widen.

First Quarter GDP: A Mixed Picture

Despite these concerns, the U.S. economy has shown signs of underlying strength. First quarter GDP declined by 0.3%, slightly worse than expectations. The drop was driven largely by an increase in imports—attributable to new tariffs—and a reduction in federal government consumption, which should help the budget in the short term.

But there were also positive signs: personal consumption, inventories, and fixed investment by businesses all rose. These areas of strength suggest the economy has momentum, even if the headline number is negative.

Why Growth Still Matters Most

At the end of the day, the best way to manage rising debt is through sustained economic growth. Strong growth supports consumer confidence, investment, and tax revenues. Both Paul and Erik stressed that despite the troubling fiscal indicators, the U.S. economy remains fundamentally solid—at least for now.

Conclusion

The downgrade of the U.S. credit rating may not have shocked the markets, but it highlights deeper structural challenges—from rising debt and deficits to unsustainable spending patterns. Still, the underlying strength of the U.S. economy offers hope for managing those risks, especially if growth remains steady.

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