By Stan Choe
Wall Street tumbled to its worst drop in months on Wednesday as its torrid rally that critics called overdone lost more momentum.
The S&P 500 sank 1.4% for its sharpest tumble since April. It was the second straight loss for the index after it hit a 16-month high last week.
The Dow Jones Industrial Average dropped 348 points, or 1%, while the Nasdaq composite fell 2.2%.
Prices were mixed in the bond market after Fitch Ratings cut the credit rating of the U.S. government. The repeated standoffs in Congress about whether to allow a default on the U.S. debt were just some of the reasons for Fitch's cut. The downgrade strikes at the core of the global financial system because U.S. Treasurys are considered some of the safest possible investments.
Fitch’s move follows a similar one by Standard & Poor’s in 2011, one that coincided with a European debt crisis to help cause stocks and bonds around the world to swing violently. So far, this most recent downgrade has caused less drama across markets.
While the downgrade highlights how much debt the U.S. government has and the big challenges it faces in how to pay for Social Security, Medicare and other expenses, none of that is news for investors.
“Fitch’s downgrade is much ado about nothing,” said Brian Jacobsen, chief economist at Annex Wealth Management.
“Yes, it’s good to call out the fiscal situation, but when a country only issues debt in its own currency, the credit rating is irrelevant. Every investment fund I’ve looked at specifies that US Treasury securities are allowed investments, regardless of what a credit rating agency might think.”
The big issues for Wall Street remain whether the economy can avoid a long-predicted recession, as hoped, and what’s happening with corporate profits. And reports on both those questions came in mixed on Wednesday.
That offered fodder for critics who say investors were too quick to buy the belief that a soft landing is surely ahead for the economy. They’ve been saying Wall Street rallied too much, too quickly this year. Analysts said some of Wednesday's selling could be investors locking in profits made during the S&P 500's 19.5% run for the year through July.
One report suggested hiring in the private sector remains much stronger than economists expected, even if it slowed slowed from the prior month.
A job market that remains solid could keep a lid on worries about a possible recession. But investors also fear a too-strong reading, which could persuade the Federal Reserve too much upward pressure still exists on inflation.
The Fed has already yanked its federal funds rate higher at tremendous speed in hopes of undercutting inflation. High rates do that by slowing the economy bluntly, but that risks causing a recession and hurts prices of investments along the way.
Inflation has been cooling since last summer’s peak, and the rising hope on Wall Street had been that the Fed won’t hike rates anymore and could even begin cutting them next year.
Wednesday’s stronger-than-expected jobs report from ADP could be a signal of what Friday’s more comprehensive report from the U.S. government will say. Fed Chair Jerome Powell has highlighted Friday's numbers as a big influence on the central bank's next move in September.
Higher rates tend to hurt technology and other high-growth stocks in particular, and Big Tech stocks helped drag the market lower. Microsoft, Nvidia and Amazon all fell more than 2.5% and were some of the heaviest weights on the S&P 500.
Generac Holdings, which sells generators and other power products, tumbled 24.4% for the biggest drop in the S&P 500 after it reported weaker profit for the spring than analysts expected.
SolarEdge Technologies dropped 18.4% after reporting weaker profit and revenue growth than forecast. It said higher interest rates are pressuring U.S. residential customers.
Most companies this reporting season, though, have been topping profit expectations. That’s usually the case, and expectations were quite low coming into this reporting season. Analysts were forecasting a third straight quarter of weaker earnings per share for S&P 500 companies.
On the winning side of Wall Street was CVS Health, which rose 3.3%. after it reported a milder drop in results than expected. Humana climbed 5.6% after it topped expectations for the latest quarter.
They were among the relatively few stocks to rise. Only about a quarter of the stocks in the S&P 500 climbed.
All told, the S&P 500 fell 63.34 to 4,513.39. The Dow dropped 348.16 to 35,282.52, and the Nasdaq sank 310.47 to 13,973.45.
In stock markets abroad, indexes were broadly lower across Europe and Asia after the downgrade of the U.S. credit rating injected some caution.
In the bond market, the yield on the 10-year U.S. Treasury rose to 4.07% from 4.04% late Tuesday. It helps set rates for mortgages and other important loans. The two-year U.S. Treasury yield slipped to 4.89% from 4.91% as its price rose.
AP Business Writers Yuri Kageyama and Matt Ott contributed.