Wall Street ends lower after bank rating cuts spark wider sell-off

US stock market: All three major Wall Street benchmarks finished lower on Tuesday in a broad sell-off after the downgrading of several lenders by credit rating agency Moody's reignited fears about the health of U.S. banks and the economy. After a five-month rally pushed the benchmark S&P 500 (.SPX) and Nasdaq Composite (.IXIC) within 5 per cent of their lifetime highs, August has now recorded five losing sessions out of six. The S&P is down 2 per cent this month, with the Nasdaq dropping 3.2 per cent.

Tuesday's decline was triggered after the agency cut ratings on 10 small- to mid-sized lenders by one notch and placed six banking giants, including Bank of New York Mellon (BK.N), U.S. Bancorp (USB.N), State Street (STT.N) and Truist Financial (TFC.N), on review for potential downgrades. Moody's also warned that the sector's credit strength would likely be tested by funding risks and weaker profitability.

Market confidence in U.S. banks has been gradually returning after the failures of three lenders earlier this year, including Silicon Valley Bank, shocked the financial system. The S&P 500 Banks index (.SPXBK) has slipped 2.5 per cent year to date, compared with a 17.2 per cent gain by the S&P 500, and the downgrades exposed the fragility of investors' confidence towards financial stocks.

The banks index slid 1.1 per cent on Tuesday, while the KBW Regional Banking index (.KRX) dipped 1.4 per cent. Big banks Goldman Sachs (GS.N) and Bank of America (BAC.N) each eased around 1.9 per cent, while Bank of New York Mellon dropped 1.3 per cent and Truist fell 0.6 per cent. Jason Pride, chief of investment strategy and research at Glenmede, noted that Moody's downgrades, as well as the notice given to larger banks about possible future action, were a public statement about the agency's concerns for the health of the banking system, and how it affects the wider economy.

"I think it's a big deal in the bigger picture of how the economy operates, because regional banks' lending is one of the main lubricants of the economy," he said. "If it slows down, the engine just doesn't work as well." Reaction to the bank downgrades pushed up the CBOE Market Volatility index (.VIX), Wall Street's fear gauge, at one point hitting a two-month high. The Dow Jones Industrial Average (.DJI) fell 158.64 points, or 0.45 per cent, to 35,314.49, the S&P 500 (.SPX) lost 19.06 points, or 0.42 per cent, at 4,499.38 and the Nasdaq Composite (.IXIC) dropped 110.07 points, or 0.79 per cent, to 13,884.32.

Eight of the 11 major S&P 500 sectors fell. While financials (.SPSY) was, understandably, one of the biggest decliners, materials (.SPLRCM) and consumer discretionary (.SPLRCD) also weighed heavily. The energy (.SPNY) index overcame an initial slump, caused by disappointing trade data from top-consumer China weighing on crude prices, to trade 0.5 per cent higher. It rebounded along with oil prices after a U.S. government agency projected a rosier economic outlook.

Healthcare shares also advanced, supported by Eli Lilly(LLY.N) jumping 14.9 per cent to a record close on news of its upbeat quarterly profits. Drugmakers globally rose after Denmark-based Novo Nordisk (NOVOb.CO) said its obesity drug, Wegovy, reduced the risk of heart disease. Dish Network (DISH.O) jumped 9.6 per cent as the pay-TV provider disclosed plans to merge with satellite communications vendor EchoStar (SATS.O), which also rose 1 per cent.

United Parcel Service (UPS.N) slipped 0.9 per cent after the U.S. economy bellwether cut its annual revenue forecast. Volume on U.S. exchanges was 10.94 billion shares, in line with the average over the last 20 trading days. The S&P 500 posted 13 new 52-week highs and 17 new lows; the Nasdaq Composite recorded 46 new highs and 195 new lows.