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Last week saw a sharp decline in major stock indices after a disappointing jobs report heightened concerns about a potential recession. This market decline, reflected in downgraded stocks and particularly evident on Friday, represented a departure from the generally robust performance that stocks had shown earlier in the year.
Before this week, the S&P500 had risen by over 15% from the beginning of 2024 to Thursday. Likewise, the Dow Jones Industrial Average And Nasdaq Both had achieved double-digit percentage increases.
The recent sell-off has raised alarm because it is linked to a slowdown in the labor market, which some investors interpret as a harbinger of a broader economic crisis.
Despite these concerns, some market participants believe that the underlying strength of the economy could help overcome these challenges and lay the foundation for a recovery in equity prices.
Against the backdrop of these developments, the weaker-than-expected employment report has sparked discussions about a possible recession and led to calls for rapid and significant interest rate cuts to mitigate economic headwinds.
However, many analysts believe that current market conditions do not mark the beginning of a bear market, which would be defined as a 20% decline from recent highs.
Now let’s take a look at these three downgraded stocks to understand the details behind their falling valuation.
Lululemon Athletica (LULU)
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Lululemon Athletica (NASDAQ:LULU) is a Canadian activewear retailer known for its yoga, running and fitness apparel. The company focuses on high-quality, fashionable and functional products and targets a health-conscious, active lifestyle market.
Goldman Sachs downgraded Lululemon shares to “neutral” from “buy,” adjusting its stance on the athletic apparel company due to “execution challenges.” The bank also revised its 12-month price target on the company’s shares, setting it at $286.
The stock downgrade came after a period of observation during which Lululemon exhibited execution issues, unimpressive launches of new innovations, and an increase in regular promotional activities.
The bank expressed less confidence in Lululemon’s near-term growth prospects in the U.S. market due to weaker execution and innovation.
Analysts were particularly disappointed by the introduction and rapid discontinuation of the Breezethrough product line, which they believed indicated a bumpier implementation than initially expected.
Recently, Lululemon announced a $1 billion increase in its share buyback program, the second in six months, demonstrating its commitment to shareholder value. The company also reported a 10% increase in quarterly revenue to $2.2 billion, beating analysts’ expectations.
McDonald’s (MCD)
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McDonald’s Corporation (NYSE:MCD) is a global fast-food chain known for its burgers, French 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, changing them to “hold” from “buy” as part of this week’s focus on downgraded stocks. The firm also slightly lowered its price target on the fast-food giant to $280 from $285.
The downgrade came after the TD Cowen analyst viewed 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 indicating a balanced risk-reward scenario.
According to analysts, current market conditions suggest that McDonald’s share price could remain in a certain range over the next 12 months. TD Cowen’s analysis indicates that McDonald’s still has a “tough task” to complete when it comes to increasing the brand’s value perception relative to its competitors.
ARM Holdings (ARM)
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Arm Holdings (NASDAQ:ARM) is a British semiconductor and software design company specializing in microprocessors, architectures and software development tools. Due to the growth of ARed content from smartphone royalties and the potential in AI markets, the stock’s 56% year-to-date increase in value has led to a high valuation.
ARM stock currently trades at a price-to-earnings (P/E) ratio of 72 for fiscal year 2026 (fiscal year ending March), significantly higher than comparable large companies in the semiconductor sector. HSBC has downgraded ARM’s rating from “Hold” to “Reduce,” citing valuation concerns as part of its rating of downgraded stocks.
The brokerage noted that while ARM has a strong position in the technology sector due to expected growth from smartphone royalties and potential in AI markets, the stock’s 56% year-to-date increase in value has led to a high valuation.
The risks mentioned include a possible decline in Android smartphone sales and a less optimistic outlook for the AI market than previously expected.
Arm Holdings has been performing exceptionally well in the technology sector and its shares have seen a significant re-rating, with analysts expressing confidence in the company’s prospects, particularly in the smartphone and emerging AI markets.
However, the current valuation suggests that the share price may have exceeded its earnings potential in the short term.
As of the publication date, Shane Neagle did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s disclosure policies.
At the time of publication, the responsible editor had neither directly nor
indirectly) positions in the securities mentioned in this article.
Shane Neagle is fascinated by how technology could revolutionize investing. He specializes in fundamental analysis and growth investing.
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