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Wall Street drops, investors step back after Fitch downgrades US

Traders work on the floor of the NYSE in New York

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 20, 2023. REUTERS/Brendan McDermid/File Photo

  • Fitch cuts US credit rating to AA+
  • Wells Fargo slides on plan to help refill FDIC coffers
  • U.S. private payrolls beat expectations in July, ADP says
  • Indexes down: Dow 0.77%, S&P 1.22%, Nasdaq 2.03%

Aug 2 (Reuters) – Wall Street dropped on Wednesday, as investors embarked on a round of profit-taking in response to the move by rating agency Fitch to downgrade the U.S. government’s credit rating.

Fitch downgraded the United States to AA+ from AAA, 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, however, 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), with recent advances 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.

“I think the market has been looking for a reason to correct, and this (downgrade) just happened to be a very good reason for it to do so,” said Gregg Abella, CEO of Investment Partners Asset Management.

Chart shows that the U.S.’s long-term foreign currency rating was downgraded by Fitch to AA+ in 2023, following a similar move from S&P in 2011.

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 at 4.1%.

Abella of Investment Partners Asset Management said the rising yield could encourage profit-taking in these high-growth tech stocks, especially given how their recent growth spurt has further stretched earnings multiples.

“Those multiples are extended, so it’s healthy to have a market which doesn’t go in one direction every single day,” he said.

At 2.05pm E.T., the Dow Jones Industrial Average (.DJI) fell 275.97 points, or 0.77%, to 35,354.71, the S&P 500 (.SPX) lost 56 points, or 1.22%, to 4,520.73 and the Nasdaq Composite (.IXIC) dropped 290.65 points, or 2.03%, to 13,993.27.

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) added 3.7% on 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 4.1% 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 1.8% lower.

Advanced Micro Devices (AMD.O) shed 6.9%, after opening higher on forecasting an upbeat finish to the year and on plans to launch AI chips that could compete with market leader Nvidia.

Reporting by Johann M Cherian and Bansari Mayur Kamdar in Bengaluru and David French in New York; Editing by Saumyadeb Chakrabarty and Vinay Dwivedi

Our Standards: The Thomson Reuters Trust Principles.

Bansari reports on the global financial markets and writes Reuters’ daily flagship market reports on equities, bonds and currencies. An economist by training and winner of the Arthur MacEwan Award for Excellence in Political Economy, she has written for renowned global papers and magazines including The Diplomat, Boston Globe, Conversation, Huffington Post and more.

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