Wall Street experienced a downturn as Fitch Ratings slashed the credit rating of the United States, leading to a tumble in tech stocks. The S&P 500 and Nasdaq Composite closed lower for the second consecutive day as investors opted to capitalize on their gains from the past five months. Fitch downgraded the U.S. credit rating from AAA to AA+, citing concerns over future fiscal performance and increasing government debt. This move marks the second time a major agency has downgraded the country’s rating, with Standard & Poor’s stripping it of its triple-A grade in 2011. Despite the downgrade, several major brokerages believe that it will not have a prolonged negative impact on the U.S. financial markets, emphasizing the greater strength of the current economy compared to 2011.
July marked the fifth consecutive month of gains for the S&P 500 and Nasdaq Composite, driven by better-than-expected earnings and optimism regarding the U.S. economy’s prospects for a soft landing. However, with August being historically characterized by slower market activity, the Fitch downgrade presented an opportunity for investors to take a breather and reassess their positions. Quincy Krosby, chief global strategist for LPL Financial in Charlotte, North Carolina, expressed the belief that market corrections can be healthy as they lead to lowered valuations and allow for dip-buying strategies.
Megacap technology stocks, including Tesla, Nvidia, Meta Platforms, and Apple, experienced notable declines after the yield on U.S. 10-year Treasury notes rose to its highest level in nearly nine months. The technology index emerged as the worst-performing sector among the 11 major S&P sectors. Krosby noted that yields surpassing 4% are not well-received by the market. However, Krosby also predicted that investors would soon shift their focus to upcoming earnings reports from major tech companies such as Amazon.com Inc and Apple, as well as the payroll report on Friday, effectively diverting attention from the Fitch downgrade.
In other news, the ADP National Employment report revealed that private payrolls grew beyond expectations in July, showing ongoing resilience in the labor market that could act as a buffer against a potential recession. Despite concerns about an economic downturn, many corporations in America continue to perform well. Refinitiv I/B/E/S reported that with approximately two-thirds of the S&P 500 companies having already released their earnings, 79.9% have surpassed analysts’ expectations, indicating that this quarter is on track for the highest beat rate since the third quarter of 2021.
CVS Health Corp registered gains after surpassing Wall Street estimates for quarterly profit, driven by strong performance in its pharmacy benefit management unit and lower-than-anticipated medical costs in its health insurance business. Emerson also experienced an increase in stock value after raising its annual profit outlook due to increased spending on automation in response to a tight labor market. However, Wells Fargo disclosed its expectation of paying up to $1.8 billion to replenish a government deposit insurance fund that suffered a $16 billion drain this year following the collapse of three banks, resulting in a decline in the bank’s shares. Furthermore, Advanced Micro Devices faced downward pressure amid concerns over the chip designer’s ambitious targets for artificial intelligence (AI) development, overshadowing the company’s optimistic outlook for the rest of the year.
As Wall Street absorbed the impact of the Fitch downgrade, the market’s attention shifted to upcoming earnings releases and economic data. Despite the short-term uncertainties, the continued strong performance of corporate America and the labor market’s resilience provided some reassurance to investors. The month of August brings with it a slower market pace, offering an opportunity for investors to reevaluate their strategies and potentially find buying opportunities amid lowered valuations.
