Stocks finished lower on Wednesday, with the Canadian benchmark index suffering its biggest decline since March 15, as investors took profits on several 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.
Reaction to the news pushed major indexes lower across the world, with the S&P 500 recording its biggest daily percentage drop since April 25. It was also the first session since May 23 in which the benchmark declined by more than 1%.
Still, several major brokerages said the downgrade was unlikely to result in a sustained drag on U.S. financial markets, noting the economy was now stronger than it was when S&P cut its rating in 2011.
July was the fifth straight month of gains for the S&P 500 and the tech-heavy Nasdaq Composite, 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, Nvidia, Meta Platforms and Apple, tumbled, as the yield on U.S. 10-year Treasury notes rose to its highest in nearly nine months.
The technology index, dropping 2.6%, was also the worst performer of the 11 major S&P sectors, with nine in total ending the day lower.
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 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 Wednesday showed U.S. private payrolls increased more than expected in July, pointing to continued labour 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.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 314.72 points, or 1.5%, at 20,218.21 - its lowest closing level since July 17.
The U.S. downgrade “put all of the markets globally on a bit of notice and with that the fears of recession are a little bit more extended,” said Michael Sprung, president at Sprung Investment Management.
All of the Toronto market’s 10 major sectors lost ground, including a near 4% drop in technology as e-commerce company Shopify Inc ended down nearly 7%. After the closing bell, Shopify - the most heavily weighted technology stock in Canada - reported revenues in its latest quarter that beat the Street consensus. The stock was volatile in extended trade in the U.S., swinging between gains and losses.
The materials group, which includes precious and base metals miners and fertilizer companies, lost 2.3% as gold and copper prices fell.
Oil settled 2.3% lower at $79.49 a barrel, weighing on the energy sector. It fell 1.7% and heavily-weighted financials ended 1.1% lower.
“You can buy a lot of yield currently that hasn’t been available in years in fairly stable, strong financial stocks. And there are better buys to be had, certainly in energy,” Sprung said. “Overall, I think there are places to be, it’s just that you’re going to have to live through a bit of a painful period here.”
Britain’s competition regulator said it was investigating Cameco Corp and Brookfield Renewable Partners’ $7.9 billion deal to acquire nuclear power plant equipment maker Westinghouse Electric. Cameco’s shares lost 3.5% and Brookfield Renewable Partners was down 4.7%.
Shares of Thomson Reuters Corp were a bright spot on the TSX, rising 1.7% after the company reported higher sales and operating profit in the second quarter.
The Dow Jones Industrial Average fell 348.16 points, or 0.98%, to 35,282.52, the S&P 500 lost 63.34 points, or 1.38%, to 4,513.39 and the Nasdaq Composite dropped 310.47 points, or 2.17%, to 13,973.45.
On the earnings front in the U.S., CVS Health Corp gained 3.3% after beating Wall Street estimates for quarterly profit, and Emerson climbed 3.8% after the industrial software firm raised its annual profit outlook.
Meanwhile, Advanced Micro Devices slipped 7% over concerns its targets for an artificial intelligence (AI) ramp-up may be too ambitious. The worries overshadowed the chip designer forecasting an upbeat finish to the year.
Volume on U.S. exchanges was 11.88 billion shares, compared with the 10.79 billion average for the full session over the last 20 trading days. The S&P 500 posted 12 new 52-week highs and five new lows; the Nasdaq Composite recorded 49 new highs and 111 new lows.
Reuters, Globe staff