Moody's downgrade of U.S. debt leads to an increase in yields, as Trump signs a $2 trillion deal during his Middle East trip, boosting AI and prompting a stock market rebound.

On May 16, 2025, Moody's downgraded the United States' sovereign credit rating from "Aaa" to "Aa1," leading the 10-year U.S. Treasury yield to rise to 4.49%, and U.S. stocks were under pressure after hours. President Trump visited the Middle East that same week, signing economic and arms deals exceeding $2 trillion with Saudi Arabia, the UAE, and Qatar, and facilitated cooperation on AI chips, which boosted tech stocks. Despite the short-term volatility caused by the downgrade, the market remained optimistic due to the strong performance of AI and tech stocks.

Moody's Downgrades US Debt, Yields Rise

Moody's announced after the market closed on May 16th that it has downgraded the US long-term sovereign credit rating from "Aaa" to "Aa1" with a "stable" outlook, citing the expanding US fiscal deficit and heavy debt burden. This makes Moody's the third major credit rating agency to downgrade the US, following Standard & Poor's in 2011 and Fitch in 2023.

Following the announcement, the yield on the US 10-year Treasury briefly rose to 4.49%, and the 30-year yield approached 5%. According to RSM Economic Research, the rise in yields reflects a market reassessment of US long-term fiscal risks, influenced by inflation and tariff uncertainties. The increase in yields also led to a decline in US Treasury prices, affecting bond ETFs and related asset performance.

Nevertheless, analysts generally believe the downgrade's actual impact on the market is limited. Zhang Shuping, Deputy General Manager of China Credit Rating, pointed out that compared to factors like inflation and Federal Reserve rate hikes, the impact of the credit rating adjustment on the bond market is relatively mild. The market had already anticipated that Moody's would follow the actions of other rating agencies, resulting in a relatively moderate reaction.

US Stocks Retreat After Hours, Weekly Gains Remain

Affected by Moody's downgrade, ETFs tracking the S&P 500 index dropped about 1% in after-hours trading, and US Treasury futures also dropped to the day's lows. However, during regular trading hours, the S&P 500 index rose 0.7%, the Dow Jones Industrial Average increased by 332 points, and the Nasdaq Composite Index rose 0.5%. For the week, the Nasdaq surged 7.2%, while the S&P and Dow rose 5.3% and 3.4%, respectively, successfully recovering the losses since the beginning of the year.

Technology stocks performed particularly well. The Philadelphia Semiconductor Index soared 10.2% for the week, with NVIDIA and AMD rising 16% and 14%, respectively, mainly benefiting from AI chip supply agreements facilitated during Trump's Middle East trip.

Trump Signs Over $2 Trillion in Agreements During Middle East Trip

In mid-May, President Trump embarked on his first Middle East visit during his second term, covering Saudi Arabia, the UAE, and Qatar. According to reports from the White House and various media outlets, the trip resulted in more than $2 trillion in economic and arms agreements, including:

Saudi Arabia's commitment to invest $600 billion in the US and a $142 billion arms deal;
A $200 billion commercial and AI cooperation agreement between the UAE and the US;
A $1.2 trillion economic and investment agreement between Qatar and the US.

These agreements cover areas such as energy, defense, infrastructure, and artificial intelligence, indicating that Middle Eastern countries are actively seeking to deepen economic cooperation with the US and reduce their reliance on oil revenues.

Major AI Chip Collaborations with the Middle East

Several US tech industry leaders accompanied Trump on his trip, including NVIDIA CEO Jensen Huang, OpenAI CEO Sam Altman, and Amazon CEO Andy Jassy. Several US AI and cloud companies reached cooperation agreements with Middle Eastern countries, including:

NVIDIA will sell hundreds of thousands of Blackwell series AI chips to Saudi Arabia and the UAE;
The UAE will collaborate with US companies to build the world's largest AI data center campus in Abu Dhabi, with an expected power capacity of 5GW;
OpenAI is exploring cooperation with the UAE and may become a major tenant of the campus;
AMD and AI startup Humain reached a $10 billion cooperation agreement;
Saudi company DataVolt announced a $20 billion investment in US AI data centers and energy infrastructure;
The UAE signed multiple cloud and cybersecurity cooperation agreements with US tech giants like Oracle, Cisco, Amazon, and Palantir.

These deals not only bring substantial orders to US tech companies but also accelerate the digital transformation of Middle Eastern countries, advancing towards AI and high-tech industry upgrades.

Market Reaction and Future Observations

Although Moody's downgrade caused short-term market fluctuations, the economic and technological cooperation outcomes from Trump's Middle East trip provided positive momentum to the market. Analysts noted that if the 10-year US Treasury yield continues to break through 4.5%, it could pressure large-cap stocks, but the market is currently focused on the strong performance of AI and tech stocks.

Investors are also watching the future trade policy moves of the Trump administration. After the visit, Trump stated he would send letters to 150 trade partners, outlining the "cost" of doing business in the US, which could introduce new uncertainties to the market.

Moody's downgrade of U.S. debt leads to an increase in yields, as Trump signs a $2 trillion deal during his Middle East trip, boosting AI and prompting a stock market rebound.

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