By David Berman
Credit rating agencies have been making noises about downgrading the United States, but where do the threats end and the cuts begin? Bank of America (NYSE:BAC) strategists are entertaining the likelihood that the U.S. credit rating will be cut to AA from AAA before the end of the year due to messy negotiations over extending the debt limit. That is, Washington will cobble together a stop-gap deal by the start of August but fail to deliver a longer-term fiscal solution.
If ratings agencies respond with a “snap” cut to the U.S. credit rating in August, the impact on the S&P 500 could be pretty nasty – and that view comes from the normally upbeat head of U.S. equity strategy, David Bianco.
“The chain reaction implications of a U.S. rating downgrade, or something worse, are difficult to predict, but we think the initial reaction to a snap rating cut to AA in August would be an S&P 500 sell-off to about 1250,” Mr. Bianco said in a note.
His bullish instincts haven’t been blunted though: He believes the selloff would be short-lived, with the index bouncing back to 1400-1500 by the end of the year. On Friday morning, the S&P 500 was down slightly, to 1342.
However, don’t put much faith in financials. They would be hit the hardest in the event of a U.S. credit rating downgrade. “We prefer global cyclicals over financials during the next two weeks of elevated uncertainty,” he said.