Fitch Downgrades US? US Market Crash? Nvidia?

Fitch's warning to USA

Rating agency has announced that it will be watching over US Debt Limit crisis very closely.

This will definitely not bode well for both Mr McCarthy and Mr Biden as negotiation is still a work-in-progress.

Last heard is that both teams will continue negotiation next week as they gear up to celebrate Memorial Day on Mon, 29 May 2023.

The lawmakers believe the public holiday is more important versus working to avert a national crisis that may crash both US economy and US stock market.


US Credit Ratings - Can they afford another downgrade?

Above are the latest US credit ratings by the 3 established agencies.

US credit rating was shaken to its core when S&P downgraded it to AA+; when US ran afoul with the Credit Limit.

Back then, Congress managed to signoff and agreed to lift the limit 2 days before D-day (x-date).

I don’t think the US Congress will be to make it, this time though.

This explains why Fitch is ready with the downgrade should US miss the 01 Jun deadline (x-date).

Downgrade repercussion

Repercussions when Fitch proceed with downgrade?

(1) Higher borrowing costs. Downgrade means a borrower is “riskier”. To attract funds from the open market, a higher yield offer is required as compensation to attract willing funds. As a result, this could (a) increase fiscal deficit and (b) increase US’s debt burden.

(2) Undermines confidence in US dollar. Every country will re-assess USD as the world's reserve currency, leading to its depreciation and inflationary pressures. At its worse, dwindling confidence could also affect (a) Global Financial system and (b) Trade, as many countries and institutions hold US dollar assets and liabilities.

(3) US Financial Market - Higher volatility and uncertainty. If the downgrade is coupled with (a) a breach of debt ceiling OR (b) default on US Treasury obligations, this could:

  • Trigger US Treasuries and other risk assets sell-off. Will it lead to another bank-run?

  • Flight to safe havens eg. gold, Swiss francs etc...

**(4) US stock market crash. On 05 Aug 2011, when S&P downgraded US credit rating from AAA to AA+ in 2011, US stock market fell.

In 2011 without inflation, stock market fell and remained depressed for at least 3 months before it managed to pull itself up.

With an April 2023 CPI (inflation) of 4.9%, will US stock market fallout stretch further than 3 months, comparatively speaking?

On a more optimistic note, $NVIDIA Corp(NVDA)$ reported a better than expected quarterly earnings after market closed on Wed, 24 May 2023.

Nvidia stock - past one year performance

  • At its lowest on 14 Oct 2022, Nvidia’s stock price was $112.27.

  • Based off 24 May 2023’s closing price of $305.38; this is a +172% gain since last oct.

  • At posting, Nvidia’s stock price is poised to start trading at +24.57% (+$74.74 to $380.12)

  • Will positivity for Nvidia be able to drive-away the “doom and gloom” shrouding the US market?

  • US 25 May pre-market indicators seems ready for a rally as well.

  • It is still too early to tell really.

In my afternoon post on Nvidia Price Will Gain +25%. I Won't Buy Though.(click to read, give aLIKe” pls) I have justified why I won’t join in the fun.

I have forgotten to mention the case for Nvidia.

Here are my “For” arguments:

(1) Leading “sector” chip.

It has a strong competitive advantage in its core markets of:

  • Artificial intelligence (AI).

  • Gaming.

  • Data centre

  • Robotics.

These industry-specific sectors are expected to grow rapidly in near future.

(2) Heavy Research & Development Investment.

Nvidia is investing heavily in R&D to launch new products & services that will enhance its AI platform and capabilities.

(3) Strong Customer Base. As with any business, a strong and reliant customer base that values its high-quality products & services is a recipe for “success”.

(4) Strategic “Cloud” Collaborations.

Has established strategic partnerships with leading cloud service providers to offer AI-as-a-service to enterprise customers.

Partners include:

(5) Strong Financial Foundation.

  • Nvidia has a robust balance sheet and free cash flow ($5.08 Billion) to weather shocks & uncertainties.

  • The company has returned $10.04 Billion to shareholders in fiscal 2023 through share repurchases and dividends. The company plans to extend its share repurchase program to $15 Billion thru Dec 2023.

Based on fundamentals, there is really nothing not to like about Nvidia. However, I still remain adamant about not investing in Nvidia now.

To know my reasons, read my other post ! (click to read & give a “LIKe” ok).

  • Do you think Fitch will downgrade US credit rating?

  • Do you think you will buy Nvidia?

Please give a “LIKe” ok. Thanks. The rating is very important to me.

Please “Share” & “Re-post” - thanks. Equally important as well!

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