Written by Haider Saleem
Financial and Political Analyst | LinkedIn / X

Introduction

Moody’s has officially stripped the United States of its last top-tier credit rating. Once the only major agency still assigning the U.S. a pristine Aaa rating, Moody’s has now lowered it one notch to Aa1.

This decision may not trigger an immediate financial crisis, but it marks a critical turning point in how investors assess risk in global markets.

In this article, we’ll cover:

1. Why Moody’s downgraded the U.S.

2. How markets responded.

3. Broader implications for global capital flows.

4. What this means for halal investing.

1. Why Did Moody’s Downgrade the U.S.?

Moody’s cited the “ballooning debt and deficits” of the U.S. government as the core reason for the downgrade. The national debt now stands at over $36 trillion, and annual deficits have been hovering around $2 trillion – a fiscal imbalance that shows little sign of correction[1].

The agency warned that debt-to-GDP could soar to 134% by 2035, up from 98% in 2024[1]. Interest payments are consuming a growing share of federal resources, and proposed tax cuts are expected to add trillions more to the deficit. Moody’s concluded that even America’s strong economic base and global currency role can no longer fully offset these risks[2].

This makes Moody’s the third major agency to strip the U.S. of its top rating, joining Fitch and S&P, which downgraded the country in 2023 and 2011, respectively[1][2].

2. How Did Markets React?

The downgrade was announced after markets closed, but its effects rippled quickly through global trading:

The S&P 500 ETF (SPY) fell nearly 1% in after-hours trading[4].
Treasury yields spiked, with the 10-year hitting 4.49%, and 30-year rates nearing 5%[2][4].
Wall Street strategists expect some investors may take profits after a recent equity rally, while others brace for higher volatility[5].

Some analysts argued that markets had long anticipated this, and the downgrade may not cause panic. Yet others warned it could gradually erode investor confidence, especially if long-term borrowing costs stay elevated[3].

3. Bigger Picture: Why It Still Matters

Moody’s move is more than symbolic, reflecting broader concerns:

Global capital costs could rise:
U.S. Treasuries serve as the benchmark for “risk-free” returns. A downgrade means investors may demand higher yields across the board, from corporates to governments[2].

Safe-haven status under question:
As geopolitical risks rise, many are questioning whether U.S. assets are as unshakable as they once seemed[5].

Political dysfunction:
The downgrade is also a commentary on governance. Moody’s pointed to the lack of bipartisan agreement on sustainable fiscal reforms as a major red flag[1][3]. 

Wall Street figures, like JPMorgan CEO Jamie Dimon, have warned that rising debt could contribute to stagflation, slowing growth while stoking inflation[1].

4. What This Means for Muslim Investors

a) U.S. Treasuries and Halal Portfolios

U.S. government bonds – though often viewed as “safe” are not considered halal due to their interest-based structure. However, they still influence the pricing of all other assets, including halal ones like equities, sukuk, and REITs. 

Higher Treasury yields may mean:

1. Greater purification requirements for dividend-paying stocks (as companies earn more from interest)
2. Pressure on equity valuations, especially in sectors like real estate and tech
3. Volatility in global capital markets, which could affect halal indices

b) Gold: A Halal Hedge Back in Focus

Gold is halal and has long been used by Muslim investors as a hedge against uncertainty. While gold fell slightly this week amid easing U.S.-China trade tensions[7], analysts at Goldman Sachs forecast a sharp rally, up to $3,700-$3,880 per ounce by 2025 – driven by central bank buying and global diversification away from U.S. assets[6]. 

Gold may offer Muslim investors an appealing hedge amid dollar fragility and high debt concerns.

c) Diversify with Sukuk and Global Markets in periods of elevated debt and downgrades:

1. Sukuk (Islamic bonds) can offer fixed-income exposure.
2. Emerging market equities may benefit from capital rotation away from U.S. assets.
3. Sector diversification, away from interest-sensitive stocks.

If you’re wondering how your portfolio aligns with Shariah standards in this climate, you might consider exploring tools like Musaffa’s halal stock screener to help assess exposure.

Conclusion

Moody’s downgrade of the U.S. credit rating isn’t a financial earthquake, but it does send a strong warning signal. It highlights the growing imbalance between America’s borrowing and its fiscal discipline. 

For Muslim investors, it’s a reminder that even “safe” assets may carry unseen risks – and that halal portfolios should be diversified, screened, and monitored.

References

1. Reuters. Moody’s cuts America’s pristine credit rating, citing rising debt. 17 May 2025.
2. Bloomberg. US Credit Rating Cut by Moody’s on Government Debt Increase. 17 May 2025.
3. Financial Times. Does Moody’s US downgrade matter? 17 May 2025.
4. Bloomberg. Stock Market Today: Dow, S&P Live Updates for May 16. 17 May 2025.
5. Bloomberg. Wall Street Strategists React to Moody’s US Credit Rating Cut. 17 May 2025.
6. Goldman Sachs. Why gold prices are forecast to rise to new record highs. 15 May 2025.
7. Yahoo Finance. Gold prices fall as easing trade concerns dampen appeal. 16 May 2025.

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