Two Sovereign Downgrades Over the Weekend: Will Monday Be Different?

Friday October 25, 2025 the S&P 500 closed at 6,791.69 at another all-time high. Saturday morning arrived with news that should matter: two sovereign credit rating downgrades—France and the USA. Markets are closed. The real question: what happens Monday?

Moody's Ratings changed France's outlook to negative while affirming its Aa3 rating. The message is clear: France is on watch, and a full downgrade is coming if fiscal problems aren't addressed.

Scope Ratings went further with the United States, downgrading the country's credit rating from AA to AA- and revising the outlook to stable. Their reasoning? Persistent federal deficits and—critically—"weakening of governance standards, especially erosion of well-established checks and balances."

Two major economies. Two downgrades. Same weekend. Announced when markets can't respond.

The real question isn't what this means in theory. It's what happens when markets open Monday.

The Facts: What Actually Happened

Let's be clear about what these downgrades mean.

France has been running unsustainable deficits for years. Political gridlock, pension reform battles, and spending that consistently outpaces revenue. Moody's didn't downgrade yet—they moved the outlook to negative, which is a warning shot. If France doesn't fix its fiscal trajectory, the actual downgrade follows. This is the eurozone's second-largest economy showing the same dysfunction that turned Greece, Italy, Portugal, and Spain into crisis cases a decade ago.

The United States is a different story, but the problems are just as real. Scope's downgrade wasn't just about debt levels—it was about governance. When a rating agency explicitly mentions "erosion of checks and balances," they're not talking about economics. They're talking about institutional stability. That's a structural concern, not a cyclical one.

Sovereign downgrades don't happen in isolation. They reflect accumulated problems that aren't being addressed.

The Pattern: Bad News Keeps Coming

This isn't the first negative signal. It's not even close.

Gold at all-time highs. US Treasuries rallying. Credit card delinquencies climbing. Jobs data getting revised down by nearly a million. Consumer stress building. And through all of it, equities grinding to new records.

Markets have ignored every warning so far. The trend has been relentlessly up, and fighting it has been expensive. Shorts get squeezed. Bears get mocked. The consensus remains: stay long, stay optimistic, trust the soft landing narrative.

But here's what's different now: we're not talking about lagging economic indicators anymore. We're talking about sovereign credit ratings—assessments of whether countries can manage their debt and govern responsibly. When rating agencies start questioning that, the stakes are higher.

Two Scenarios for Monday

I don't know what the market does Monday. No one does. But there are two possibilities, and both matter.

Scenario A: The Market Ignores It (Again)

Monday opens, equities shrug off the news, and the grind higher continues. Treasury yields barely move. The dollar weakens slightly but not enough to matter. Gold ticks up but doesn't break out. VIX stays low.

This is the most likely outcome in the short term. Markets have ignored bad news for two years. Why would this be different? Momentum traders keep buying. Algorithms follow the trend. Retail piles in on dips. The path of least resistance is still higher.

If this happens, it doesn't mean the downgrades don't matter. It means the market isn't ready to care yet. But every ignored signal adds to the pile. Eventually, the weight becomes too much.

Scenario B: This Is the Crack That Spreads

Monday opens, and something shifts. Treasury yields spike as investors demand a risk premium. The dollar weakens structurally, not just tactically. Gold breaks out to new highs. VIX jumps on even minor equity pullbacks. Defensive sectors start outperforming tech.

This is the less likely outcome Monday, but it's the one that matters more. Because if the market finally starts pricing in sovereign risk—if investors stop assuming US Treasuries and French bonds are risk-free—the repricing is violent. It doesn't happen gradually. It happens all at once.

What I'm Watching Monday

I'm already positioned for a downturn, as I wrote yesterday. But here's what I'm monitoring to see if the market is finally paying attention:

US Treasury yields: If 10-year yields spike despite the Fed being dovish, it means investors are demanding compensation for sovereign risk. That changes everything.

Euro/USD: If the euro weakens against the dollar despite both countries getting downgraded, it suggests France's problems are worse. If the dollar weakens despite US equity strength, it suggests confidence is cracking.

Gold: Already at all-time highs. If it breaks out further Monday, it confirms flight-to-safety is accelerating beyond just inflation hedging. Sovereign debt concerns drive gold much higher than inflation fears alone.

VIX behavior: If VIX spikes disproportionately on small down moves, it means options markets are pricing in tail risk. That's fear creeping in.

Sector rotation: If defensives (utilities, consumer staples, healthcare) start outperforming tech and discretionary, that's risk-off behavior. Money doesn't hide in boring stocks during a bull market—it hides there when things are about to get rough.

The Accumulation of Signals

I don't know if Monday is the day the market wakes up. Maybe it shrugs this off like it has everything else. Maybe we grind to 7,000 first.

But here's what I do know: these signals are accumulating. Gold at all-time highs. Treasuries rallying. Consumer stress building. Data revisions exposing inflated narratives. And now, sovereign credit downgrades questioning fiscal sustainability and governance.

Yesterday, I wrote that I'm preparing for a pivot because the signs beneath the surface are shifting. You can read it here: https://nardaggio.com/bull-or-bear-why-im-preparing-for-a-pivot/ Less than 24 hours later, two rating agencies confirmed those concerns with downgrades announced over the weekend when no one can react.

The market can ignore this. It probably will, at least initially. But ignoring reality doesn't make it go away. It just means you're not ready when reality forces itself into the price.

I'd rather be early and prepared than late and caught.

Monday will tell us whether the market is ready to care. Either way, I'm watching.

Welcome to Nardaggio. Let's separate signal from noise.

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