Stocks Drop 1% on S&P's U.S. Outlook

NEW YORK ( TheStreet) -- Stocks shed more than 1% Monday after Standard & Poor's lowered its ratings outlook for the U.S. to negative from stable.

The Dow Jones Industrial Average dropped 140 points, or 1.1%, to close at 12,201 after dropping by more than 2% earlier in the session to a low of 12,093. The S&P 500 finished lower by 14 points, or 1.1%, to close at 1,305, and the Nasdaq declined by 29 points, or 1.1%, at 2,735.

On the Dow, Caterpillar ( CAT), Bank of America ( BAC), Alcoa ( AA) and DuPont ( DD) were the biggest laggards. Boeing ( BA) was the only Dow component that closed in positive territory. Johnson & Johnson ( JNJ) saw a modest drop after trading higher earlier in the session. Earlier, medical device company Synthes confirmed that it is talking with J&J regarding a possible business combination .

Citigroup ( C) topped Wall Street's profit expectations by a penny with earnings of 10 cents a share but first-quarter revenue of $19.7 billion fell short of the $20.55 billion that analysts had been projecting. The stock finished flat at $4.42.

The market reeled after Standard & Poor's downgraded its long-term rating outlook on U.S. sovereign debt on concerns about the country's mounting budget deficits . The ratings agency maintained its triple-A rating for the U.S. but said, "We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013."

"I think this just brings home the realization of something that everyone has known: the deficit has to be addressed. It has to be addressed quickly and it has to be addressed forcefully," said Quincy Krosby, a market strategist at Prudential Financial. "If it isn't dealt with, then the U.S. will get an actual downgrade, which means that the cost of capital will keep rising -- particularly for the U.S. government. The collateral damage of that will be a weaker overall economy."

Tim Speiss, vice president of EisnerAmper Wealth Planning, believes the market will bounce back from today's losses as the rating on U.S. debt is still unchanged. "The horse is not yet out of the barn," said Speiss. "We have known about the debt problem. Now we know there is a 1 in 3 chance of a downgrade in 2013. But the U.S. still has levers to cause that not to happen."

The threat of a downgrade might spur the government to work towards getting the country's deficit under control, according to the analyst. However, he said that austerity measures could impact sectors that are dependent on government spending, such as healthcare and public works projects, which means investors need to be more cautious when it comes to investing in certain sectors.

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