After a strong rally in growth stock and other tech companies, analysts are advising investors for a sectorial rotation to defensive stocks.
On Wednesday, August 2, US equities entered a major correction as Fitch downgraded the long-term rating for the US. The tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) index corrected more than 2% registering its biggest drop in a day since February 2023.
Nasdaq tanked under 14,000 ending the trading session at 13,973.45. On the other hand, the S&P 500 (INDEXSP: .INX) registered a pullback of 1.38% closing at 4,513 levels. Similarly, the Dow Jones Industrial Average (INDEXDJX: .DJI) tanked 0.98% or 348.16 points ending at 35,282.52.
Fitch Ratings downgraded the US long-term foreign currency issuer default rating to AA+ from AAA, citing expected fiscal deterioration. This is the first downgrade since 2011 when Standard & Poor’s made a similar move. Speaking on the development, Mona Mahajan, senior investment strategist at Edward Jones said:
“Investors may use this Fitch downgrade as a reason to take some profits, but we think that was probably a natural part of the market cycle anyway, after such a strong run, very little volatility. Broadly speaking, this hasn’t deterred our fundamental view of the economy or markets.”
Mona further added that the US economic scenario continues to show signs of resilience. Also, the conditions look quite different in comparison to the last time when the US received the downgrade rating.
Wall Street Focuses on Earnings Results
Wall Street analyzed recent earnings reports. CVS Health’s shares rose 3.3% due to strong earnings with cost-cutting measures. Humana gained 5.6% as its medical costs were lower than expected. On the other hand, Advanced Micro Devices fell 7% after a disappointing forecast, impacting other chip stocks. SolarEdge Technologies tumbled 18.4% after missing revenue expectations.
Stocks of tech giants took some major beating dragging the Nasdaq down by over 2%. On Wednesday, the market experienced a selloff, breaking the months-long uptrend dominated by growth stocks. Technology stocks led the decline as the 10-year Treasury yield reached its highest level since November. Chinese tech giants JD.com and Baidu fell over 4% due to proposed limits on smartphone use for minors in China. Alibaba dropped 5%. Major companies like Amazon, Alphabet, and Microsoft lost more than 2% each, and Nvidia saw a decline of nearly 5%.
Jay Woods, chief global strategist at Freedom Capital Markets, described Wednesday’s shift from technology stocks to defensive sectors as a much-needed “constructive rotation” after the tech-driven rally. He said:
“There is money still being put to work. There’s no rush to the exits right now. It’s just a headline that’s given us fuel to finally move some chips around a little bit without upsetting the general overall trends, which have been up since the beginning of the year when it comes to tech.”
We are already more than halfway through earnings season, and companies continue to deliver stronger-than-expected results. According to FactSet data, around 82% of S&P 500 companies that have reported earnings have posted positive surprises.