Fitch affirms US credit rating at 'AA+' with stable outlook

Fitch Ratings affirmed the United States’ Long-Term Foreign Currency Issuer Default Rating at ’AA+’ with a Stable Outlook, citing the nation's large economy and the dollar's global reserve status, despite concerns over high fiscal deficits and rising government debt, which it projects to reach 124% of GDP by 2027. The agency forecasts a narrowing general government deficit to 6.9% of GDP in 2025, driven by increased revenues, notably an estimated $250 billion from surging tariffs at a 16% effective rate. Fitch also anticipates US economic growth to slow to 1.5% in 2025 due to factors including higher tariffs, and expects only one 25-basis-point interest rate cut this year, attributing Federal Reserve caution to inflationary pressures from tariff hikes.

Analysis

Fitch Ratings has affirmed the United States' 'AA+' Long-Term Foreign Currency Issuer Default Rating with a Stable Outlook, grounding the decision in the country's structural strengths, such as its large, dynamic economy and the dollar's status as the world's primary reserve currency. However, this stability is contrasted by significant fiscal headwinds, with Fitch highlighting that US government debt is more than double the 'AA' rating median. The agency projects the debt-to-GDP ratio will continue its upward trajectory, rising from 114.5% at the end of 2024 to 124% by 2027. Despite these debt concerns, the general government deficit is forecast to narrow to 6.9% of GDP in 2025 from 7.7% in 2024, partly due to a substantial increase in government revenues. This revenue surge is attributed to economic growth and a dramatic increase in tariff collections, which are expected to reach $250 billion this year following a rise in the effective tariff rate to 16%. Concurrently, Fitch forecasts a notable deceleration in US economic growth from 2.8% in 2024 to 1.5% in 2025, citing the dampening effects of higher tariffs, spending cuts, and policy uncertainty on consumer and business sentiment. This outlook directly impacts monetary policy expectations, with Fitch anticipating only one 25-basis-point rate cut in the current year, as the Federal Reserve remains cautious about the inflationary pressures created by the tariff hikes.

Key Decisions for Investors

• Investors should closely monitor the US debt-to-GDP trajectory, as the projected increase to 124% by 2027 represents a long-term fiscal risk that could eventually pressure Treasury yields, despite the current stable rating.
• Given the forecast for US economic growth to slow to 1.5% in 2025, consider re-evaluating exposure to cyclical sectors that are highly sensitive to weakening consumer spending and business investment.
• The expectation of only one rate cut this year due to tariff-induced inflation suggests a 'higher for longer' interest rate environment, which could act as a headwind for equity valuations, particularly for long-duration growth assets.
• The significant economic impact attributed to fiscal policies, including aggressive tariff hikes, introduces a high degree of policy-driven market volatility, warranting a cautious stance and consideration of hedging strategies for broad market exposure.