Investors should still watch rising bond yields, which could eat into appetites for high-growth tech stocks

Moody’s U.S. credit downgrade means volatility for tech stocks in the short term.

While technology stocks had a volatile reaction to two other major U.S. credit downgrades in recent years, Friday’s latest rating cut from Moody’s isn’t expected to punch a dent in tech stocks this year.

Moody’s adjustment to the U.S. government’s credit rating was from Aaa to Aa1, a notch down on the firm’s 21-notch rating scale. The firm cited the increase in government debt over the past 10 years, as well as interest-payment ratios that have reached levels significantly above countries with similar ratings, as the reasons.

When S&P Global downgraded the U.S.’s credit rating from AAA to a AA+ in 2011, the stock market had a big reaction because there were many unknowns, including how institutional investors would shift their positions based on their mandates. And when investors feel uncertain, they sell first and ask questions later, said Charles-Henry Monchau, chief investment officer of Syz Group. Since we have been through this before, he expects a more muted reaction this time.

Below is a chart that shows how the Technology Select Sector SPDR Fund (XLK), which tracks the S&P 500’s technology sector, fell by 6.2% in the first session following the S&P Global downgrade on Aug. 5, 2011. The tech-heavy Nasdaq was down by 7.8% for the same session, according to Dow Jones Market Data. The month that followed was volatile for the sector.

The chart below shows how the fund and index reacted to Fitch’s U.S. credit downgrade on Tuesday, Aug. 1, 2023. The Technology Sector SPDR fell 2.3% the following day and was down about 4% by the end of the week. The Nasdaq fell by 2.6%, the following day and was off 3% by the end of the week, according to Dow Jones Market Data. The month following was also volatile for the sector.

Moody’s downgrade last week wasn’t a huge surprise, said Monchau. The firm had lowered its U.S. sovereign-credit rating outlook from stable to negative in November 2023, so this move was to be expected. Still, the market reacted swiftly as stocks opened lower on Monday morning with the S&P 500 down by 0.9%. The tech-heavy Nasdaq was down 1.4%, before both indexes erased their losses and closed up on the day. The Technology Select Sector SPDR Fund fell 0.8% on Monday morning but pared most of its losses.

Meanwhile, the yield on the 10-year had an intraday high of 4.57% on Monday and the 30-year spiked above 5%, before settling back down near 4.45% and 4.91% respectively.

The rising bonds yields are what pose a bigger risk to tech stocks, mainly because higher returns on government bonds increase their relative appeal versus stocks. Despite a less favorable U.S. credit rating, government bonds still pose less risk than stocks, hence why they are used as the risk-free rate that’s benchmarked against other assets. Simply put, investors increasingly choose lower-risk government bond yields of 4.5% to 5% over choppy growth stocks with outlooks far into the future.

However, tech stocks have a bit of wind in their sails this time thanks to the excitement around artificial intelligence. Hyperscalers are still planning on big spending when it comes to AI-infrastructure development. Meanwhile, five of the “Magnificent Seven” companies, including Amazon.com Inc., Alphabet Inc., Apple Inc., Meta Platforms Inc., and Microsoft Crop., had solid first-quarter earnings, and Nvidia Corp.’s results are on deck next week.

Although many of the big tech companies largely gave vague guidance, investors seem a bit more comforted after President Donald Trump announced a temporary reduction in reciprocal tariffs between the U.S. and China.

Big Tech hasn’t erased its 2025 losses. The Roundhill Magnificent Seven ETF (MAGS) is still down by about 3.5% this year. But in a May 16 note, analysts at Goldman Sachs said they expected the seven stocks collectively to still outperform the rest of the market, based their earnings-growth expectations, though by a smaller margin than they have over the past couple of years.