Last week witnessed a sharp decline in major stock indexes following a disappointing jobs report that heightened concerns over a potential recession. This market downturn, highlighted by downgraded stocks, which was mostly evident on Friday, marked a deviation from the generally robust performance stocks had exhibited earlier in the year.
Prior to this week, the S&P 500 had ascended over 15% from the start of 2024 through Thursday. Similarly, the Dow Jones Industrial Average and Nasdaq had both enjoyed double-digit percentage gains.
The recent selloff has raised alarms due to its connection to a slowdown in the labor market, which some investors interpret as a precursor to a broader economic slump.
Despite these fears, there is a sentiment among some market participants that the underlying strength of the economy could help it overcome these challenges and set the stage for a rebound in stock prices.
Amidst these developments, the weaker-than-expected jobs report has sparked discussions about the possibility of a recession and prompted calls for quick and large cuts in interest rates to mitigate economic headwinds.
Still, many analysts are suggesting that the current market conditions do not herald the beginning of a bear market, defined as a 20% drop from recent highs.
Let’s now take a look at these three downgraded stocks to understand the specifics behind their declining ratings.
Lululemon Athletica (LULU)
Lululemon Athletica (NASDAQ:LULU) is a Canadian athletic apparel retailer known for its yoga, running, and fitness wear. The company focuses on high-quality, stylish and functional products, targeting a health-conscious, active lifestyle market.
Goldman Sachs downgraded shares of Lululemon from buy to neutral, adjusting its stance on the athletic apparel company due to “execution challenges.” The bank also revised its 12-month price target for the company’s shares, setting it at $286.
The stock downgrade comes after a period of observation where Lululemon exhibited issues with execution, unimpressive innovation launches and an increase in regular promotional activities.
The bank expressed diminished confidence in Lululemon’s near-term growth prospects within the U.S. market, due to weaker execution and innovation.
The analysts were particularly disappointed by the launch and rapid discontinuation of the Breezethrough product line, which they saw as indicative of choppier execution than initially expected.
Recently, Lululemon announced a $1 billion boost to its share-buyback program, the second in six months, showing its commitment to shareholder value. The company also reported a 10% rise in quarterly revenue to $2.2 billion, beating analysts’ expectations.
McDonald’s (MCD)
McDonald’s Corporation (NYSE:MCD) is a global fast-food chain renowned for its burgers, fries, and beverages. The company operates a vast network of restaurants worldwide, offering quick-service meals and emphasizing convenience, consistency, and affordability.
TD Cowen adjusted its rating on McDonald’s shares, moving from a buy to a hold rating as part of this week’s focus on downgraded stocks. The firm also slightly reduced the price target for the fast-food giant to $280 from the previous $285.
The downgrade comes as the analyst at TD Cowen perceives the stock’s recent positive performance, following McDonald’s second-quarter results and the outlook for the second half of the year in the U.S. and international markets, as indicative of a balanced risk/reward scenario.
According to analysts, the current market conditions suggest that McDonald’s stock price may remain within a certain range over the next twelve months. TD Cowen’s analysis points to a “tall hill to climb” for McDonald’s in terms of enhancing the brand’s value perception when compared to its competitors.
ARM Holdings (ARM)
Arm Holdings (NASDAQ:ARM) is a British semiconductor and software design company specializing in microprocessors, architectures, and software development tools. ARed content growth from smartphone royalties and potential in AI markets, the stock’s year-to-date appreciation of 56% has led to a high valuation.
ARM stock is currently trading at a forward FY26e (fiscal year ending March) price-to-earnings (P/E) ratio of 72 times, which is considerably higher than its large-cap semiconductor peers. HSBC downgraded ARM from ‘Hold’ to ‘Reduce,’ citing valuation concerns as part of their assessment of downgraded stocks.
The brokerage firm noted that while ARM has a strong narrative in the technology sector due to expected growth from smartphone royalties and potential in AI markets, the stock’s year-to-date appreciation of 56% has led to a high valuation.
The risks mentioned include a possible deceleration in Android smartphone sales and a less optimistic outlook on the AI market than previously anticipated.
Arm Holdings has been a standout performer in the tech sector, with its shares experiencing significant re-rating. The analysts expressed belief in the company’s prospects, especially in the smartphone and emerging AI markets.
However, the current valuation suggests that the stock’s price may have outpaced its earnings potential in the near term.
On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
