Wall Street Recoils as Fitch US Rating Cut Sends Investors Retreating

Wall Street Reacts to Fitch‘s US Rating Cut

On August 2, 2023, Wall Street ended the day on a downbeat note as investors took profits and reacted to Fitch Ratings’ decision to downgrade the United States’ credit rating from AAA to AA+. The S&P 500 and Nasdaq Composite, both major indexes, recorded their biggest daily percentage drops since April 25. This comes as a blow to the US government as Fitch becomes the second major agency to cut the country’s credit rating, following Standard & Poor’s downgrade in 2011.

Economic Concerns and Fiscal Deterioration

Fitch‘s downgrade was attributed to expected fiscal deterioration over the next three years and growing government debt. These concerns pushed investors to take a step back, fearing a potential impact on US financial markets. However, major brokerages believe that the downgrade is unlikely to have a sustained negative effect due to the current strength of the US economy compared to 2011.

The US has seen five consecutive months of market gains, driven by better-than-expected earnings and optimism about the overall state of the US economy. Nevertheless, with the market entering a seasonally slow period in August, the downgrade provided an opportunity for investors to take a breather.

Market Reaction and Tech Stock Tumble

Following Fitch‘s downgrade, rate-sensitive mega-cap stocks, including Tesla, Nvidia, Meta Platforms, and Apple, experienced significant declines. The yield on US 10-year Treasury notes reached its highest level in nearly nine months, which was not well-received by the market. The technology index, dropping 2.6%, was the worst-performing sector among the 11 major S&P sectors.

Quincy Krosby, the chief global strategist for LPL Financial, commented that the rising yields were not what the market wanted to see. However, Krosby also predicted that investors would soon shift their focus to big tech company earnings and the upcoming payroll report, moving past Fitch‘s downgrade.

Labor Market Resilience and Earnings Reports

Despite concerns about a potential recession, corporate America has continued to perform well. The ADP National Employment report for July showed private payrolls exceeding expectations, indicating ongoing strength in the labor market that could protect the economy from a recession.

Furthermore, with around two-thirds of the S&P 500 companies having reported earnings, an impressive 79.9% have exceeded analysts’ expectations. This quarter is poised to have the highest earnings beat rate since Q3 2021.

Among the notable earnings reports, CVS Health Corp gained 3.3% after surpassing Wall Street estimates for quarterly profit, and Emerson climbed 3.8% after raising its annual profit outlook. Conversely, Advanced Micro Devices slipped 7% over concerns about the feasibility of its ambitious targets for an artificial intelligence (AI) ramp-up, overshadowing the company’s positive forecast for the rest of the year.

Looking Ahead

As the market looks beyond the immediate impact of Fitch‘s downgrade, attention will turn to upcoming events such as the earnings reports from Amazon.com Inc and Apple, as well as the payroll report on Friday. These data points will play a key role in shaping market sentiment and determining the trajectory of financial markets in the near future.

Conclusion

While Fitch‘s downgrade of the US credit rating from AAA to AA+ has momentarily shaken Wall Street, experts believe that the market will soon rebound as investors shift their focus to other market drivers. The strength of the US economy and positive earnings reports from major corporations provide a solid foundation for confidence in the market’s resilience. However, ongoing vigilance is necessary, as economic indicators and geopolitical factors can quickly reshape market dynamics.