Stocks dove Wednesday after Fitch downgraded the long-term rating for the U.S. and Wall Street assessed the fallout.
The Dow Jones Industrial Average slid 274 points, or 0.8%. The S&P 500 pulled back 1.3%, and the Nasdaq Composite shed 2%.
Fitch Ratings cut the long-term foreign currency issuer default rating for the U.S. to AA+ from AAA Tuesday night, citing "expected fiscal deterioration over the next three years."
"Investors may use this Fitch downgrade as a reason to take some profits, but we think that was probably a natural part of of the market cycle anyway, after such a strong run, very little volatility," said Mona Mahajan, senior investment strategist at Edward Jones. "Broadly speaking, this hasn't deterred our fundamental view of the economy or markets."
The economic picture continues showing signs of resilience, and conditions look very different than the last time U.S. credit got a rating downgrade, she added.
Risk-off sentiment return Wednesday. Technology stocks led the declines as the 10-year Treasury yield punched above 4.1% to its highest level since November. Chinese tech names JD.com, Alibaba and Baidu fell more than 4% as China proposed limits smartphone use for minors. Mega caps Amazon, Alphabet, Microsoft and Nvidia slumped more than 2%.
On top of that, a busy earnings week carried on. CVS Health rose about 4% after posting strong earnings as it trims costs, while Humana gained after posting lower-than-expected medical costs. Elsewhere, Advanced Micro Devices fell 6.6% despite better-than-expected results. SolarEdge Technologies tumbled 19% after missing second-quarter revenue expectations.
Earnings season is more than halfway through with results coming in stronger than expected. Of the S&P 500 companies that have reported, about 82% have posted positive surprises, according to FactSet data. The earnings beats have added to bullish investor sentiment, continuing this year's recovery.
"A soft landing is quickly becoming consensus and stocks may take a breather post a strong rally," said Emmanuel Cau, head of European equity strategy at Barclays. "But absent a negative catalyst to alter the goldilocks narrative, we think the grind higher can continue."
— CNBC's Darla Mercado contributed to this report.
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Dow falls more than 250 points after Fitch downgrade dampens sentiment: Live updates - CNBC
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