Maybe you heard? Our partners at Standard and Poor’s caused a bit of a stir by downgrading U.S. debt from AAA to AA+. Though they’re quick to note the equity research team is separate and distinct from the ratings arm, we went to the source for their view on the downgrade’s impact on six individual sectors and the overall economy. Here’s some of what they had to say (full comments can be found here).
According to Alec Young, S&P Equity Strategist, regrading the overall economy, “We believe the global equity impact of the decision by S&P Ratings to downgrade U.S. sovereign debt, while difficult to predict with strong conviction given its unprecedented nature, is likely to be manageable. … [W]e believe equity investors will likely refocus quickly on fundamentals, which we think, while not great, are far from terrible.”
Investors should concentrate on tech/telecom stocks with strong free cash flow and robust balance sheets
“For the S&P 500 technology sector, S&P Equity Research Services sees a number of potential impacts related to the recent downgrade of the U.S. sovereign credit rating. We note that near-term U.S. debt downgrade-driven worries could dampen demand, but the third quarter is typically the least important for the technology sector. However, related after-shocks affecting fourth-quarter business could have serious repercussions.” —Todd Rosenbluth and Scott Kessler, S&P Equity Analysts
2) HEALTH CARE
S&P recommends certain large, dividend-paying pharmaceutical stocks, like Abbott Labs and Merck
“S&P Equity Research Services (ERS) believes the near-term effect on the health care sector will be modest, but caution about potential long-term negatives. The downgrade may increase the potential of Congress implementing significant spending cuts to entitlement programs such as Medicare, according to ERS. In this scenario, numerous health care industries could face cuts in Medicare reimbursement rates, adversely affecting revenue and potentially services provided.” —Jeffrey Loo, CFA, S&P Equity Analyst
The industrials sector is one of only two that get an overweight ranking from S&P Equity Strategy
Although Friday morning’s jobs report boasted better hiring trends than some investors expected, the Friday evening downgrade of U.S. sovereign debt by S&P’s Ratings could move the needle back in the other direction. The issue is uncertainty, and employers do not like to add to headcount in uncertain times.
“The global equity markets’ response to the after-hours downgrade of U.S. government debt will likely be driven by one thing: Uncertainty. Not uncertainty that the U.S. can pay its bills, since the recent raising of the debt ceiling has assured it will, but the immeasurable fallout that a lower rating will have on the U.S. and global economies as a result of the anticipated rise in bond yields and borrowing costs,” says Sam Stovall, S&P’s chief investment strategist. —S&P Equity Research
4) ENERGY, UTILITIES
Oil stocks could come under pressure due to the U.S. debt downgrade
“As of Monday, oil extended last week’s 9% plunge, sparked by Friday evening’s after-market-hour downgrade of U.S. sovereign debt by Standard & Poor’s Rating Services, which operates independently from S&P Equity Research.
The oil price downturn is likely to weigh heavily on energy stocks as well. In recent months, crude futures have been showing sensitivity to any and all macroeconomic data suggesting the U.S. is weakening or could enter a “double-dip” recession. —S&P Equity Research
5) INVESTOR, CONSUMER, FINANCIALS
Certain securities could be affected by higher interest rates and slower economic growth
Stick with high-quality large-cap top-ranked companies that garner a significant amount of revenue from emerging markets, like Wal-Mart, Coca-Cola or General Mills.
The past week already witnessed an accelerating erosion of investor confidence and equity values. “Because prices have come down so quickly, this may present some buying opportunities in the short term,” notes S&P’s Chief Equity Strategist, Sam Stovall. —S&P Equity Research
Bank stocks were hit hard Monday and Wednesday, but S&P thinks positives remain
In our view, Standard & Poor’s Rating Services’ downgrade of the long-term debt rating of the United States will not likely result in immediate changes to how banks operate. We think the downgrade was widely expected, and believe banks are ready for it. —Erik Oja, S&P Equity Analyst
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