S&P affirms 'AA+' credit rating for US, cites impact of tariff revenue

S&P Global affirmed the U.S. 'AA+' credit rating with a stable outlook, asserting that anticipated tariff revenue will largely offset the fiscal impact of recent tax cuts and spending legislation. This affirmation, which saw no immediate market reaction, occurs despite the U.S. budget deficit growing nearly 20% to $291 billion in July and public debt interest rising 6% to over $1 trillion, even with a $21 billion increase in customs duties. S&P highlighted potential downgrade triggers including escalating deficits or political weakening of institutions, contrasting with Moody's earlier downgrade citing rising debt levels, which now exceed $37 trillion.

Analysis

S&P Global has affirmed the United States' 'AA+' credit rating with a stable outlook, positing that revenue from newly implemented tariffs will offset the fiscal strain from recent tax cuts and spending legislation. The agency's thesis relies on "meaningful tariff revenue" to counteract deficit growth, citing a $21 billion increase in customs duties in July. However, this affirmation comes amid deteriorating fiscal metrics, as the government budget deficit simultaneously grew nearly 20% to $291 billion in the same month, and the national debt has surpassed a record $37 trillion. Furthermore, interest on public debt has increased by 6% to $1.013 trillion in the first ten months of the fiscal year. S&P's outlook is conditional, with the agency warning it could lower the rating within two-to-three years if deficits continue to expand or if political developments compromise the independence of institutions like the Federal Reserve. This stance contrasts with Moody's recent downgrade of the U.S. sovereign rating, which was prompted by rising debt levels, and expert commentary highlights that the tariffs central to S&P's forecast also act as a drag on economic activity, creating uncertainty about their net impact.

Key Decisions for Investors

• Investors should prioritize monitoring core fiscal data, such as the monthly budget deficit and debt servicing costs, over the headline rating, as S&P explicitly cites their deterioration as a primary trigger for a future downgrade.
• Closely evaluate the economic impact of the administration's trade policy, as any significant slowdown in trade or consumption could undermine the tariff revenue S&P is relying on, thereby invalidating its stable outlook.
• Factor in political risk as a direct credit consideration, particularly any developments that appear to challenge the effectiveness of policymaking or the independence of the Federal Reserve, which S&P identified as a potential ratings pressure point.
• Treat the 'AA+' affirmation with caution, recognizing it is contingent on a precarious fiscal balance and stands in contrast to Moody's recent downgrade, suggesting underlying credit risks remain elevated despite the stable outlook.