
With Moody’s recent decision to lower the U.S. credit rating from Aaa to Aa1, all three major rating agencies have now removed America’s top-tier debt status. This follows Fitch’s downgrade in 2023 and Standard & Poor’s similar move back in 2011. Moody’s action comes at a time when Congress is working on a new budget bill that could increase yearly deficits, highlighting tensions between tax reduction policies and financial sustainability. Many regular investors are wondering how these developments might affect their personal financial strategies.
Budget talks have regularly created market uncertainty
Over the past fifteen years, negotiations about the federal budget and arguments over the debt ceiling have often caused market swings. Notable examples include the 2011 Standard & Poor’s downgrade of U.S. debt, the 2013 fiscal cliff situation, and government shutdowns in 2018 and 2019. Despite these disruptions, agreements were eventually reached in each case, allowing markets to recover and continue growing.
Interestingly, after the unprecedented 2011 downgrade that triggered a market drop, the S&P 500 fully recovered within months. Though it may seem strange, even with these downgrades, U.S. Treasury securities continue to be viewed as safe investments during unstable market periods and remain crucial to financial markets.
When considering national debt and Washington budget conflicts, it’s important to maintain perspective. As citizens and voters, it’s reasonable to worry about the country’s unsustainable financial direction. Finding solutions to these problems isn’t simple, and various expert groups and proposals have failed to meaningfully reduce yearly budget shortfalls.
While these issues matter, it’s best not to make sudden changes to your investment portfolio because of them. Though past fiscal problems and downgrades created uncertainty, markets have historically stabilized and recovered over time. A disciplined approach focused on long-term goals, spreading investments across different assets, and solid investment basics – rather than reacting to Washington headlines – remains the best strategy for achieving financial objectives.
Moody’s downgrade happens as investors shift focus from tariffs to Washington’s budget proposal. Markets performed well after last year’s election partly due to expectations of growth-friendly policies and an extension of the 2017 Tax Cuts and Jobs Act (TCJA), but the Moody’s announcement reminds us of ongoing fiscal challenges.
Specifically, Moody’s highlighted that “successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” and that they “do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
Tax Cuts and Jobs Act provisions may soon be extended or made permanent
Congress is currently working on a new budget bill with provisions that continue to evolve. The latest proposal aims to provide stability by extending individual tax cuts from the TCJA that would otherwise expire after 2025. This would prevent a potential “tax cliff” where tax rates would return to pre-TCJA levels, possibly disrupting the economy. By addressing these issues well before the expiration date, lawmakers hope to create certainty for both households and businesses.
This comprehensive tax package includes many provisions affecting both businesses and individuals. Key elements, which might still change, include:
For Individuals:
- Making the TCJA individual tax rates permanent, keeping the top rate at 37%
- Increasing the child tax credit from $2,000 to $2,500 through 2028
- Possibly raising the state and local tax (SALT) deduction cap from $10,000 to $30,000
- Exempting tips and overtime pay from income tax through 2028
- Making interest on car loans tax-deductible through 2028
- Creating a new savings account called “money account for growth and advancement” (“MAGA accounts”) for children under 8 to use for education, small business investments, and first-home purchases
For Businesses:
- Increasing the pass-through business deduction from 20% to 23% and making it permanent
- Bringing back 100% bonus depreciation for qualified business assets acquired between January 2025 and 2029
- Reinstating research and development tax deductions
The proposal doesn’t include a “millionaire tax” or changes to carried interest tax treatment that some had expected. The debt ceiling, which limits how much the country can borrow, might also be raised by $4 trillion.
Budget shortfalls may continue to increase the national debt
While the current proposal includes about $1.6 trillion in spending cuts through changes to programs like Medicaid and food assistance, these reductions are smaller than the tax cuts and spending increases in other areas.
Yearly budget deficits are important because they add to the national debt, which now exceeds $36 trillion – roughly $106,000 for every American. Reports suggest the proposed budget could add approximately $3 trillion or more to the debt over the next decade. The most recent estimate from the Joint Committee on Taxation, a nonpartisan congressional committee, indicates the debt could grow by $3.7 trillion during this period.
The national debt has grown significantly in recent decades, with interest payments continuing to rise. Since most federal spending goes toward mandatory programs like Social Security and Medicare, finding agreement on major spending cuts is politically difficult. This is why some experts worry that tax rates may eventually need to increase, even if the TCJA is extended or made permanent soon.
Although deficit and debt levels matter for the economy’s long-term health, their immediate impact should be viewed in context. Markets have historically performed well under various levels of government debt and deficit spending. Surprisingly, some of the strongest market returns in the past twenty years came after the worst deficits, typically because these coincided with economic crises when markets were already at low points. In other words, making investment decisions based solely on government spending and deficits would not have been helpful.
The bottom line? The U.S. credit rating downgrade reflects worries about America’s long-term financial path. The current budget negotiations may further complicate these concerns. However, history suggests that investors can best navigate these challenges by staying invested and sticking with a long-term financial plan.
We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. Advisory services offered through EGSI Investment Management, Inc., a Registered Investment Advisor with the State of Ohio. Insurance services offered through EGSI Financial, Inc. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product. Any references to protection benefits, safety, security, or steady and lifetime income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claimspaying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured. The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product. Any references to protection benefits or steady and reliable income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured. The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Copyright (c) 2025 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services Powered by Clearnomics 4 are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company’s stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security–including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.