Fundamental Analysis

US Equities Close with Broad Declines as Moody’s Downgrades Spark Concerns

  • There are renewed concerns about the well-being of US banks and the economy.
  • The S&P 500 Banks index has slipped 2.5% year-to-date.
  • European equities fell due to the cabinet approving a 40% windfall tax on Italian banks.

On Tuesday, US equities ended the day in decline due to a widespread sell-off. The credit rating agency Moody’s downgraded several lenders, sparking renewed concerns about the well-being of US banks and the economy.

After a five-month surge, which brought the S&P 500 and Nasdaq Composite close to their all-time highs, August has seen five out of six sessions result in losses. The S&P has fallen 2% this month, while the Nasdaq has experienced a 3.2% drop. 

The decline on Tuesday was triggered by the agency’s decision to lower the ratings of 10 smaller to medium-sized lenders by one notch. Additionally, six major banks, including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial, were placed under review for potential downgrades.

Moody’s also warned that the sector’s credit strength could face challenges from funding risks and decreased profitability. Confidence in US banks has been gradually recovering following the failures of three lenders earlier this year.

The S&P 500 Banks index has slipped 2.5% year-to-date, in contrast to the S&P 500’s substantial gain of 17.2%. The downgrades have exposed the fragile nature of investor confidence in financial stocks.

During Tuesday’s trading, the banks index declined by 1.1%, and the KBW Regional Banking index saw a dip of 1.4%. 

Jason Pride from Glenmede noted that Moody’s downgrades and the notice given to larger banks were a public statement about the agency’s concerns for the banking system’s health and how it affects the broader economy.

European equities fell on Tuesday due to the cabinet’s approval of a 40% windfall tax on Italian banks. However, the losses were partially offset by an increase in the shares of drugmaker Novo Nordisk, which rose due to positive data on its obesity drug.

Italian banks (Source: Bloomberg)

Italian banks (Source: Bloomberg)

Italian banks like Intesa Sanpaolo, Banco BPM, and UniCredit saw their stock prices drop by 5% to 9.1%. This decrease followed Deputy Prime Minister Matteo Salvini’s announcement that the 40% tax on banks’ additional profits would finance various initiatives. 

The broader Eurozone banks experienced a significant decline of 3.5%, marking their most substantial drop since March. This was due to the banking sector decline in the US.