S&P 500 History Suggests 10% Drop After Downgrade — Followed By 35% Rally

It's downgrade déjà vu. Late Friday, after Wall Street had already packed up for the weekend, Moody's quietly dropped the hammer: the U.S. just got its credit rating cut from Aaa to Aa1.

If this feels familiar, that's because it is – and the market's playbook has been pretty consistent. The real question now: Will the market freak out for the third time, or has it finally learned to chill?

Another 10% Correction Coming?

Let's rewind.

In August 2011, Standard & Poor's made history by downgrading U.S. debt for the first time ever. The result? A 10.37% drop in the S&P 500 Index over the next 41 trading days, according to data analyzed by Piranha Profits. But fast forward 12 months, and the index was up 36%. Investors who bought the dip didn't just survive – they thrived.

Then came August 2023, when Fitch pulled the same move. Same script, different year. The S&P 500 slid 10.31% over 58 trading days. But again – patience paid off. One year later, stocks were up a cool 37%.

Now, here comes Moody's, joining the downgrade party. And yes, if the market follows precedent, we could be looking at another 10% correction.

Read Also: Jim Cramer Recalls 2011’s 6.7% Market Decline After US Debt Downgrade, Says It ‘Ultimately Meant Nothing:’ Dan Niles Sees Limited Downside Amid Tariff Rollbacks, FOMO

Bulls Have Reasons To Shrug This One Off – But Will They?

But here's the twist – after two prior false alarms, has Wall Street stopped reacting to credit downgrades like it's the end of the world? After all, these cuts haven't exactly spelled disaster in the long run. Quite the opposite.

And let's not ignore the context: strong earnings from tech giants, resilient consumer spending, and cooling inflation may give bulls a reason to shrug this one off.

But if markets do panic on Monday, history suggests it could be yet another gift-wrapped opportunity to scoop up high-quality stocks at a discount.

Because if there's one thing we've learned, it's this: America's credit rating may slip – but investor memory tends to fade faster than a market dip lasts.

For investors holding broad S&P 500 ETFs like SPDR S&P 500 ETF SPY, iShares Core S&P 500 ETF IVV, and Vanguard S&P 500 ETF VOO, the Moody's downgrade may feel unsettling at first glance – especially heading into Monday's open. But history offers a useful compass. During the past two U.S. debt downgrades in 2011 and 2023, the S&P 500 fell over 10% within two months, only to surge more than 35% over the following year. If markets follow a similar playbook, any short-term volatility could prove to be a golden buying window for long-term investors.

In other words, don't be surprised if passive index investors wind up thanking Moody's by this time next year.

Will Wall Street overreact a third time?

Or has the market finally grown up?

We'll find out Monday.

Read Next:

• Moody’s Had An Investment Grade Rating On US Debt During 2008 Global Financial Crisis: Recent Cut ‘Not A Huge Shock,’ Says Expert

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