S&P expects 'meaningful tariff revenue' to offset Trump tax bill impact, maintains U.S. credit rating

S&P Global maintained its AA+ long-term U.S. sovereign debt rating, projecting that "meaningful" federal revenue from new tariff policies will largely offset weaker fiscal outcomes stemming from the recently enacted tax-and-spending bill, which the CBO estimates will increase deficits by $3.4 trillion by 2034. While July saw a $21 billion rise in customs duties, the federal deficit still grew by nearly 20% for the month. S&P's stable outlook hinges on U.S. economic resilience and effective monetary policy, though it cautioned that ratings could be lowered if deficits increase due to spending issues, or if political developments undermine U.S. institutions or the Federal Reserve's independence, potentially jeopardizing the dollar's reserve currency status.

Analysis

S&P Global has affirmed its AA+ rating on long-term U.S. sovereign debt with a stable outlook, basing this decision on the expectation that significant revenue from new tariff policies will largely neutralize the weaker fiscal outcomes from the recent tax-and-spending legislation. This fiscal balancing act is critical, as the Congressional Budget Office projects the new law will increase the federal deficit by $3.4 trillion through 2034, stemming from a $4.5 trillion revenue decrease partially offset by a $1.1 trillion spending cut. While the Treasury Department reported a nearly $21 billion increase in customs duties in July, reflecting the impact of tariffs, the federal budget deficit simultaneously grew by almost 20% for the same month, highlighting the significant fiscal pressures at play. S&P explicitly warns that a rating downgrade could occur within the next two to three years if political gridlock prevents the containment of rising deficits. More systemically, the agency cautioned that political developments undermining U.S. institutional strength or the Federal Reserve's independence could jeopardize the U.S. dollar's primary reserve currency status, which it identifies as a key pillar of the nation's credit strength.

Key Decisions for Investors

• Investors should closely monitor monthly Treasury data, specifically comparing customs duty collections against the overall budget deficit, to validate S&P's core assumption that tariff revenues can offset fiscal slippage.
• Given the explicit warning about risks to the dollar's reserve currency status linked to political developments, it may be prudent to review and potentially hedge long-term USD exposure.
• The stable outlook provides a window to assess portfolio sensitivity to a potential rise in U.S. sovereign risk, as S&P has outlined a two-to-three-year timeframe for a possible downgrade if fiscal discipline erodes.