Three Stocks to Target if the Fed Keeps Cutting Interest Rates

The Federal Reserve made their first rate cut in over two years last September and the hope is that more are coming in 2025. If so, it will likely lead to a favorable environment for certain sectors and stocks.

Lower interest rates generally reduce borrowing costs, stimulate consumer spending, and can lead to higher valuations for growth stocks. Below are three stocks that could perform well if the Fed continues to cut interest rates:

Starting in the Tech sector, Microsoft (MSFT) remains a strong growth story, benefitting from an increase in the present value of future earnings in a low-rate environment. As interest rates decrease, the present value of future cash flows (a key metric for valuing growth stocks) increases.

The company’s diversified business model, which includes cloud computing (Azure), software (Office, Windows), gaming (Xbox), and enterprise solutions, should continue to thrive in a lower interest rate environment.

The growth of Microsoft’s cloud computing and artificial intelligence (AI) offerings further supports its high-growth potential, making it attractive to investors seeking capital appreciation. The company has a solid balance sheet and has topped Wall Street’s estimates over the past nine quarters.

The company will announce numbers later this month with analysts expecting a profit of $3.19 a share on revenue just under $69 billion. Shares are down from last July’s all-time high of $468.35 with key support around the $410 area.

The second sector that could perform well are Real Estate Investment Trusts (REITs). Annaly Capital Management (NLY) and other mortgage REITs are highly sensitive to interest rate movements because they typically offer high dividend yields, which become more attractive when interest rates decline.

As bond yields fall, investors often shift to dividend-paying stocks, and REITs benefit from this shift. Annaly primarily invests in mortgage-backed securities that are collateralized by residential mortgages. These types of investments can provide stable cash flow that tend to perform well in a low interest rate environment.

The company announces earnings in early February and fell a penny shy of estimates in the prior quarter. These are some of the risks with owning a higher-dividend yielding stock but the company has been around since 1996 and remains one of the better managed mortgage REITs in the business.

The current yield is just north of 14% with Annaly paying four quarterly dividends of 65 cents in 2024. The chart does show some downside risk, however, if shares fall below key support at $18. If breached, there could be risk down to $14.50 with the late October low at $14.52. The 50-day moving average has fallen below the 200-day moving average and this is typically a bearish signal for lower lows.

The last stock we want to highlight is Home Depot (HD). Lower interest rates typically make mortgages more affordable, which can increase demand for homes and home improvement products. As the leading retailer in the home improvement space, the company stands to benefit from this trend, especially if consumers are more willing to take on mortgages or make home improvements due to lower borrowing costs.

Home Depot has a resilient business model and remains on track for solid earnings growth as consumer spending picks up and housing activity accelerates. The company’s wide moat, efficient supply chain, and extensive store network make it well-equipped to weather economic cycles, and lower interest rates could accelerate its revenue growth.

The chart shows shares falling below their 50-day moving average in mid-December after hitting an all-time high of $439.37 in late November following earnings. The company topped estimates for the 18-straight quarter with revenue topping $40 billion for the quarter. There is risk down to $370 and the 200-day moving average on continued weakness and where astute investors might start bargain hunting.

These stocks are well-positioned to benefit from a scenario of continued interest rate cuts by the Federal Reserve, particularly as lower rates create favorable conditions for growth, income, and consumer spending.