What Analysts Say About US Credit Downgrade by Fitch

The unexpected downgrade of US government debt sent shockwaves across the economic and political landscapes. In financial markets, the move was met with what amounts to a shrug.

US stock futures fell as much as 1% overnight before cutting that decline in half as of 7:30 a.m. in New York — a minuscule move for contracts on the S&P 500, an index that’s rallied for five straight months. Reaction was also muted in the Treasury and foreign-exchange markets, with the 10-year yield sliding and the dollar little changed versus major peers.

The general consensus among strategists and fund managers has been that the rating cut should have a limited impact on equities, with Wells Fargo & Co. saying any pullback will be “short and shallow” and Liberum Capital describing the news as a “tempest in a teapot.”

For some, it’s a good excuse to book some profits after an 18% jump this year in the S&P 500. The index hasn’t had a down day of 1% or more in 47 straight sessions, the longest such streak of calm days since January 2020.

Here’s what analysts and strategists had to say:

Alexandre Baradez, chief market analyst at IG in Paris:

“One can have the feeling that the market is looking for excuses to take some profits. But rather than the Fitch downgrade, I suspect that what’s currently being priced is the growing risk of an economic slowdown. The downward trend started to emerge yesterday on the back of disappointing Chinese and US data, which suggests it’s not really about the rating downgrade but rather the risk of a slowdown.”

Chris Harvey, head of equity strategy at Wells Fargo & Co.:

“Fitch’s downgrade should not have a similar impact to S&P’s 2011 downgrade given the starkly different macro environments and other reasons. Heading into S&P’s Aug 2011 downgrade, markets were in “risk-off” mode, with equities in a correction, credit spreads widening significantly, rates falling, and the GFC was still in the market’s collective conscience. Today, we have almost the opposite: IG credit spreads hit a YTD low of 112bps at month end, interest rates have been floating up, the SPX has returned 20% YTD, and many investors expect the Fed to cut rates by early 2024. As a result, we believe any equity market pullback would be relatively short and shallow.”