Investment Insights

US Credit Rating Downgrades Hits Investor Sentiment

  • Aug 09, 2023
  • Andrew Gillham

US stocks fell had their worst week since Silicon Bank’s collapse in early March as mixed corporate earnings and a downgrade of the US’s credit rating undermined sentiment. The blue-chip S&P 500 and technology focussed Nasdaq indices fell 1.5% and 2.5% respectively.

Shares in Apple, the world’s largest company with a market value of $2.8 trillion, fell nearly 5% on Friday after it reported that its sales slipped for a third consecutive quarter. iPhone revenue, which accounts for just under half the company’s total, of $39.7 billion was 2% lower than in the same period a year ago and iPad sales fell by 20%.

Revenue from its services division, which includes App Store sales, iCloud, Apple TV+ and Apple Music, rose 8% to a record high $21.2 billion on the back of adding 150 million new subscribers over the past 12 months. CEO Tim Cook pointed out that the company had performed “exceptionally well” in emerging markets and revenue growth of 7.9% in China partially offset a 5.6% decline in the Americas, Apples largest market.

In stark contrast, shares in Amazon gained more than 8% on Friday after reporting earnings which were well ahead of most analysts’ forecasts. The digital retailer’s online sales rose 11% from a year earlier to $134.4 billion, confounding expectations that the slowing economy would hurt demand, and revenues at its cloud division, Amazon Web Services, grew by 12%.

Investors were also impressed by efforts to achieve great efficiencies, including reducing its headcount by around 27,000 so far this year, which have helped to lift operating profit margins to 5.7%. Amazon shares have gained 67% year-to-date, boosting the net worth of its largest shareholder Jeff Bezos to $163 billion.

Travel related companies have also been on a tear this year and shares in Booking Holdings, the parent of, Agoda and Kayak, surged to a record high of $3,243 after it reported gross bookings rose 15% to $39.7 billion in the second quarter.

Booking also raised its full year earnings outlook on expectations of a record summer travel season and CEO Glenn Fogel added that the company is investing in AI technology to help achieve its connected trip vision of travellers using its apps to book all aspects of their holidays.

Late on Tuesday, Fitch Ratings unsettled markets when it downgraded the US long-term credit rating by one notch from AAA to AA+. The rating agency cited the country’s growing debt burden and steady deterioration in governance of the past couple of decades, including the political brinkmanship over lifting the country’s debt ceiling earlier this year.

The Biden administration criticised the action and US Treasury Secretary Janet Yellen asserted US government securities will remain the world’s most safe and liquid asset. JP Morgan CEO Jamie Dimon added that “it doesn’t really matter that much” and it is ridiculous that other countries are rated higher than the US when they depend on it for stability and security.

The Bank of England raised its benchmark interest rate by another 0.25% to 5.25% on Thursday in a widely expected move. The decision on the nine-member Monetary Policy Committee wasn’t however unanimous with two members voting for a steeper 0.5% hike and another member voted for no change.

The majority on the committee, including Governor Andrew Bailey, felt that whilst interest rates will need to go up further to bring inflation back to its 2% target rate, some progress has been made and it takes time for the impact of earlier rate hikes to be fully felt. The BoE expects inflation to slow to around 5% by year-end at which time markets are pricing in interest rates to peak at 5.75%.

Global oil prices edged lower and Brent Crude slipped to $85 a barrel, ending a run of six straight weekly gains. Saudi Arabia’s announcement that it will extend its 1 million-barrel-per-day production cut for a third month to the end of September was offset by concerns over weaker demand from China, the world’s largest importer of crude oil.

(Cover Image Source: NEOM)

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.