Sentiment remained downbeat on Tuesday as the U.S. stock market traded in the negative. This followed Monday's positive session but was influenced by poor Chinese data and a warning from Fitch about potential downgrades for major U.S. banks, including JP Morgan Chase & Co. Higher-than-expected retail sales in July, which rose 0.7% month-on-month compared to the anticipated 0.4%, failed to boost stocks. Minneapolis Fed President Neel Kashkari suggested that the Fed may need more data before deciding on further rate increases and emphasized the importance of avoiding a scenario similar to the 1970s where the Fed stopped raising rates too soon.

In Tuesday's trading, the S&P 500 Index fell 0.8% and dropped below 4,450 points. The Dow Jones Industrial Average lost 300 points or 0.84%, while the tech-heavy Nasdaq 100 fell 0.7%. The weakest link was the Russell 2000, with small-cap equities falling 1% for the day.

According to LPL analysts Jeffrey Buchbinder and Lawrence Gillum, the downgrade of the U.S. sovereign rating may keep the 10-year Treasury yield above its fair value in the near term, despite cooling inflation. They predict that the yield will eventually settle back down to the mid-to-high threes. The analysts also believe that a Fed pause is increasingly likely in September, which should help lower rates and support core bond returns. They noted that the U.S. debt situation is unlikely to cause the same market volatility as in 2011 but mentioned that stocks have moved beyond what is justified by fundamentals in the short term, suggesting a 5%-10% pullback is overdue.

In terms of major U.S. equity ETFs, the SPDR S&P 500 ETF Trust (SPY) was 0.8% lower, the SPDR Dow Jones Industrial Average ETF (DIA) fell 0.9%, and the Invesco QQQ Trust (QQQ) was 0.6% lower. All 11 S&P 500 sectors weakened, with the Energy Select Sector SPDR Fund (XLE) being the worst performer, down 2%, followed by the Financial Select Sector SPDR Fund (XLF), down 1.5%. The Health Care Select Sector SPDR Fund (XLV) managed to limit losses, down only 0.2%.

The Commerce Department reported a 0.7% monthly increase in retail sales for July, surpassing expectations and building on the upwardly revised figure for June. However, the NY Empire State Manufacturing Index fell considerably below market expectations, dropping from 1.1 in July to -19 in August 2023.

Notable stocks in focus included Lucid Group Inc. (LCID), which fell over 5%, and Tesla Inc. (TSLA), which fell nearly 2%. Nvidia Corp. (NVDA) rose 2.2%, while PayPal Holdings (PYPL) fell 4% after a major shareholder sold its entire stake. Discover Financial Services (DFS) fell over 10% following the announcement of CEO Roger Hochschild's resignation. Several companies were scheduled to report after the close, including Agilent Technologies, Inc. (A), Jack Henry & Associates, Inc. (JKHY), and H&R Block, Inc. (HRB).

In commodities, crude oil fell 2.2% to $80 per barrel, and the United States Oil Fund ETF (USO) was 2.1% lower. Treasury yields remained steady, with the 10-year yield flat at 4.2% and the two-year yield down 3 basis points to 4.94%. The iShares 20+ Year Treasury Bond ETF (TLT) was 0.3% lower for the day. The U.S. dollar index (UUP) fell 0.1%, while the EUR/USD pair (FXE) was 0.1% higher. European equity indexes closed in the red, with the SPDR DJ Euro STOXX 50 ETF (FEZ) falling 1.2%. Gold fell 0.1% to $1,904/oz, and silver fell 0.1% to $22.55. Bitcoin (BTC/USD) was 0.4% lower at $29,301.

This report was updated by staff writer Piero Cingari on Tuesday.