Wall Street ends down, investors step back after Fitch US rating cut
Wall Street closed down on Wednesday, with the S&P 500 and Nasdaq Composite lower for a second straight day, with investors taking profits on five months of gains a day after rating agency Fitch cut the U.S. government’s credit rating.
Fitch downgraded the United States to AA+ from AAA late on Tuesday, citing expected fiscal deterioration over the next three years as well as growing government debt. Fitch was the second major agency to cut the country’s rating. In 2011 Standard & Poor’s stripped the country of its triple-A grade.
Several major brokerages said the downgrade was unlikely to result in a sustained drag on U.S. financial markets, noting that the economy was now stronger than it was in 2011.
July was the fifth straight month of gains for the benchmark S&P 500 (.SPX) and the tech-heavy Nasdaq Composite (.IXIC), driven by better-than-expected earnings and hopes of a soft landing for the U.S. economy.
However, with markets entering a seasonally slow August, the Fitch downgrade offered an opportunity for investors to take a breather.
“Sometimes it’s healthy to have this digestion in the market, as it brings down valuations a bit and it allows for dip-buying,” said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, North Carolina.
Rate-sensitive megacap stocks, including Tesla (TSLA.O), Nvidia (NVDA.O), Meta Platforms (META.O) and Apple (AAPL.O), tumbled, as the yield on U.S. 10-year Treasury notes rose to its highest in nearly nine months.
The technology index (.SPLRCT) was also the worst performer of the 11 major S&P sectors.
Yields being above 4% is “not what the market wants to see”, according to LPL’s Krosby, who also predicted investors will soon look beyond Fitch’s downgrade and turn their focus to big tech company earnings due after the close on Thursday.
“The market is now going to focus on Amazon.com Inc (AMZN.O) and Apple tomorrow afternoon, and then on the payroll report on Friday, and we’ll say goodbye to Fitch,” Krosby said.
Meanwhile, the ADP National Employment report showed private payrolls increased more than expected in July, pointing to continued labor market resilience that could shield the economy from a recession.
Despite lingering fears of a recession, corporate America has continued to perform well. With around two-thirds of the S&P 500 having already reported, 79.9% have posted earnings above analysts’ expectations, per Refinitiv I/B/E/S.
This puts the quarter on track for the highest earnings beat rate since the third quarter of 2021, per the data provider.
On the earnings front, CVS Health Corp (CVS.N) gained after beating Wall Street estimates for quarterly profit, boosted by strength in its pharmacy benefit management unit and lower-than-expected medical costs in its health insurance business.
Emerson (EMR.N) climbed after the industrial software firm raised its annual profit outlook as companies increase spending on automation in response to a tight labor market.
Elsewhere, Wells Fargo (WFC.N) said it expects to pay as much as $1.8 billion to help replenish a government deposit insurance fund that was drained of $16 billion this year after three banks collapsed, sending its shares lower.
Advanced Micro Devices (AMD.O) slipped over concerns that the chip designer’s targets for an artificial intelligence (AI) ramp-up may be too ambitious. The worries overshadows the company forecasting an upbeat finish to the year.